Document management company Xerox Holdings Corporation (XRX) have been trading in a range for most of the past year. One trader sees shares continuing to trend toward the lower end of that range in the weeks ahead.
That’s based on the May $14 puts. With 28 days until expiration, 4,247 contracts traded compared to a prior open interest of 119, for a 36-fold rise in volume on the trade. The buyer of the puts paid $0.60 to make the bearish bet.
Shares recently went for about $14.30, so the stock would need to decline about 2 percent for shares to move in-the-money. The stock still has a ways to trend lower before testing its 52-week low of $11.80.
Xerox has dropped by about 25 percent in the past year. The stock looks reasonably valued, going for about 10 times forward earnings and trading at a 30 percent discount to its book value. However, the company hasn’t been profitable in the past year.
That suggests shares will remain rangebound, and will likely continue to trend lower in the short-term.
Action to take: Investors may want to wait for a further drop in shares before buying. At the moment, Xerox yields 6.8 percent. But that dividend is unsustainably high based on current earnings. A dividend cut could lead to a fast drop for Xerox stock.
For traders, the May puts can likely deliver mid-double-digit gains in the coming weeks as shares trend lower. Shares could drop as early as next week, when Xerox reports earnings.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.