Options Corner: Why The Smart Money Is Wagging Its Tail For Chewy Ahead Of Earnings

While the ongoing trade wars have imposed economic uncertainty — particularly over the retail sector — the U.S. pet supply market has demonstrated resilience. With e-commerce specialist Chewy Inc CHWY set to release its earnings results on Wednesday before the opening bell, there's a high-risk, high-reward opportunity available. Essentially, speculators could front-run the possibility of positive results by digging in early.

A few important clues suggest that Chewy could pleasantly surprise Wall Street next week. First and foremost is the fundamental argument: Americans simply love their pets. A little more than one year ago, Morgan Stanley projected that average annual household spending per pet could expand from $980 in 2020 to $1,292 by this year. Also, by 2030, this metric could see a sizable boost to $1,909.

Granted, the aforementioned tariffs and the unique challenges of the present juncture add complexities to this narrative. Nevertheless, Morgan Stanley's projection benefits from credibility as various sources reported that Americans have continued to splurge on their four-legged friends despite inflationary headwinds. This backdrop should represent a net positive for CHWY stock.

Another factor to consider is analysts' favorable opinions. It's not just about the consensus Buy rating, which certainly adds confidence. Rather, it's that investment experts were optimistic about Chewy's prospects prior to the volatility associated with tariffs and their related challenges.

For example, in early January, Mizuho Securities upgraded CHWY stock to Outperform from Neutral while also raising its price target to $42. When the opinion was published, the move represented a 13.29% upswing. At this time, a pop to $42 would mean a profit of over 26%.

Just a few months ago, Mizuho analysts believed that the pet economy would recover, leading to top-line growth. Since consumers have already demonstrated that they prioritize the well-being of their pets despite financial woes, the experts' core argument likely remains relevant.

Smart Money Inflows into CHWY Stock Provide the Knockout Punch

Without question, it's always advantageous for a company to conduct business within the context of a rising tide. It's also encouraging to see distinguished analysts pound the table on a favored enterprise. That said, these elements don't necessarily influence the day-to-day ebb and flow of the market in a predictable fashion. To better understand the battlefield, one should consider smart money inflows.

Benzinga's screener for unusual options activity is a powerful tool for better deciphering possible forward movements. For CHWY stock, the so-called whales were noticeably bullish on the e-commerce business.

During the Tuesday session, the biggest transaction was for sold (or written) $42.50 puts expiring July 18 of this year. At the time of the transaction, the premium received (or the bid) was $11.80 or $1,180 for every 100 shares that each option contract represents. Therefore, the implication is that CHWY stock won't materially drop below $30.70.

To clarify, put writers are underwriting the risk that the target security will not fall below a defined threshold, as represented by the strike price. So long as the security stays above the strike price, the risk underwriter keeps the premium that the put buyer — who is betting that the stock in question will fall — paid.

In this case, the nuance is that if CHWY stock falls below the breakeven price of $30.70 (based on intrinsic value), the put writer risks assignment; that is, being forced to buy shares as put buyers exercise their options. Stated differently, $30.70 may represent technical support, as this is where the smart money is comfortable buying Chewy stock.

A major risk factor to consider, though, is the statistical framework. Since Chewy's initial public offering, a long position held for any given eight-week period has a 53% chance of being profitable. Under the dynamic condition of modest momentum, this probability rises to 60%. However, in the earlier weeks, the probability favors the bears.

Of course, what makes this circumstance different is the upcoming earnings report. Obviously, this will be the main driver for swing traders.

Anticipating Good News for Chewy

For those who see good tidings ahead for Chewy, there are two compelling ideas to consider. First, aggressive speculators may want to research the 34/35 bull call spread expiring March 28. This transaction involves buying the $34 call (at a time-of-writing ask of $167) and simultaneously selling the $35 call (at a bid of $120). The proceeds from the short call partially offset the debit paid for the long call, resulting in a net cash outlay of $47.

Should CHWY stock reach or exceed $35 at expiration next Friday, the trader can collect the maximum reward of $53. This comes out to a max payout of almost 113% — not bad for one week's worth of speculation.

For those who want a simpler approach, buying the $35 call outright for the options chain expiring July 18 is an intriguing idea. The bulls will almost certainly be targeting the psychologically and technically significant $40 level. Further, the July expiration date gives speculators enough time for this longer-term thesis to pan out.

On the other hand, a lot can happen between now and July. Ultimately, the decision comes down to individual risk tolerance.

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