HP, Inc. (HPQ) will announce its fiscal Q3 results after the market close today. Investors are piling into long-dated, deep out-of-the-money put options expiring in more than 9 months. The short-put yield is high, but could HPQ stock be set for a drop?
HPQ is at $29.69 in midday trading, near a recent peak of $31.30 on Aug. 13. But is it at a peak? Is this a case of “sell on the news?”
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HPQ stock - last 3 months - Barchart - Aug. 26 For example, last quarter HPQ stock peaked just after its May 27 fiscal Q2 earnings release. It peaked on June 1 at $29.34, close to today's price, as can be seen in the chart above.
As a result, it may be repeating that cycle. That may be why some investors are buying much lower (i.e., deep out-of-the-money) strike price put options.
Concerns About Earnings and HPQ's Valuation
I discussed this in a recent Barchart article on Aug. 11. Investors piled into $28.00 strike price puts expiring Oct. 16, which was 66 days to expiry.
This may be because investors are concerned that high memory and semiconductor device prices have dampened consumer demand for PCs, printers and other HP products.
For example, analysts are expecting a 1.55% revenue drop for HP, Inc.'s upcoming Q4, after an expected 3.28% rise in fiscal Q3, according to Yahoo! Finance.
In other words, the market may not be as concerned about Q3, but more about its Q4 performance (i.e., ending October 31, 2026).
That could also be why analysts have significantly lower price targets than today's price.
For example, Yahoo! Finance reports the average PT of 17 analysts is $23.41. That's 21% below today's price. Similarly, Barchart's mean survey PT is $25.48.
Is this why there is so much volume in long-dated put options today
Huge Unusual Long-Dated Put Options Volume
Today's Barchart Unusual Stock Options Activity Report shows this. Over 3,000 put contracts have traded at the $22.00 strike price expiring on June 17, 2027. That's over 9 months from today (i.e., 295 days to expiry or DTE).
This volume is over 29 times the prior number of puts outstanding at that strike price and expiry period.
HPQ puts expiring June 17, 2027 - Barchart Unusual Stock Options Activity Report - Aug. 26 - (before earnings results released after the market close) The point is that some large institutional investors may be buying puts ahead of earnings. Are they expecting another huge drop in HPQ after the earnings come out?
Possibly. But consider this. They are paying a hefty premium for that bet.
For example, the $1.79 premium represents 8.136% of the $22.00 strike price. That means that the short-sellers of these puts are getting a nice yield for the next 9 months or so.
Moreover, HPQ will have to drop to $20.21 before there is any intrinsic value for the put option buyers. That means they are betting on a 31.9% drop in HPQ stock (i.e., $20.21/$29.69-1) over that period.
Conversely, the sellers of these puts get to have a much lower potential buy-in point, even if things become difficult for HP, Inc. over the next 9 months.
Valuation Considerations
One point to consider is that analysts now estimate that earnings next year will be lower than this year (ending Oct. 31). For example, analysts project just $3.00 earnings per share (EPS) for Oct. 2027, vs. $3.04 this year (ending Oct. 2026).
Usually, analysts have higher EPS forecasts. So, that is concerning to any investor in HPQ stock.
Moreover, if its Q3 earnings today come in lower than expected (i.e., 69 cents per share), or if management projects lower fiscal Q4 revenue and earnings, that could weigh heavily on HPQ stock.
So, along with analysts' lower price targets, concerns about consumer demand for HPQ's products and its upcoming earnings profile could lower its fair market value.
Should Investors Copy This Trade?
As a result, although long-dated puts provide a good opportunity for long-term investors who are shorting them, it might make sense to wait until a week or so after earnings come out.
If HPQ has not dropped, and if the short-put yield is still high, then investors might consider copying this short-put play. After all, it provides a good yield and a much lower potential buy-in point. The worst that can happen is that investors end up with an unrealized loss holding HPQ stock.
Buyers of these long-dated puts may also be taking a risk, in case earnings come out stronger than expected.
Nevertheless, the “sell on the news” cycle is very strong with HPQ stock. Investors willing to speculate can buy these long-dated puts, betting that HPQ drops over the next 9 months.
Keep in mind that buying puts, even on a long-dated basis like this, can result in a 100% loss of capital.
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.
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