Heavy out-of-the-money put option volume in Shoe Station Group (SHOE) today, ahead of tomorrow's earnings, suggests investors expect a dip in SHOE stock. However, SHOE stock is cheap, and shorting puts yields over 7.7% over the next month.
SHOE is at $13.29 in midday trading, well off its recent peak of $16.11 a month ago on Aug. 10. This may be selling ahead of earnings.
Shoe Station, a discount family-oriented shoe store that runs Shoe Carnival stores and an online family footwear site, generated 2.5% lower revenue last quarter and 23 cents in normalized earnings per share (EPS).
This quarter, analysts expect $298 million in revenue, 2.7% below last year's $306.4 million revenue. However, the analysts also forecast 34 cents in normalized EPS. The problem is that last year it made 70 cents per share.
So, the headline numbers may push SHOE stock lower, as it will show a huge dip in YoY EPS growth.
However, this implies that SHOE stock is very cheap, with an EPS forecast of $1.48 this year. That puts it on a forward price/earnings (P/E) of just 9.0x, and just 7.2x for the following year ($1.84 EPS).
This may be why investors are shorting puts in heavy volume and also why buyers are jumping in, expecting another dip in SHOE stock.
Unusually Heavy Volume in Out-of-the-Money SHOE Puts
Today's Barchart Unusual Stock Options Activity Report shows this. It shows that over 3,300 put options have traded at the $12.50 strike price expiring on Oct. 16, 2026, or 37 days from now.
That volume is over 24 times the prior number of contracts outstanding at that price. It shows that a lot of buyers expect the stock to dip after earnings and stay low even a month later.
On the other hand, short sellers of these puts can collect premium at an attractive yield. The 94-cent premium represents a 7.52% yield on the $12.50 strike price.
The thinking here is that although earnings may disappoint, the company is still profitable. Therefore, at $12.50, the forward P/E is just 8.4x earnings this year and 6.79x next year's EPS forecast.
SHOE stock may not stay this cheap unless analysts lower their forward EPS projections. For example, Seeking Alpha shows that its average forward P/E metric has been 9.38x over the last five years.
Moreover, if short sellers can repeat this 7.52% each month for the next quarter, the expected return is attractive at 22.56%.
The bottom line is that although the heavy put volume assumes that SHOE could dip after earnings tomorrow, short sellers are happy to collect the high premium for the next month.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.