CVS Caremark Corporation (CVS) reported its second-quarter results ahead of the open this morning. The drugstore company reported a profit of 65 cents per share, falling short of the consensus estimate for a profit of 68 cents per share on $24.12 billion in revenue. The equity also cut its full-year forecast to $2.68 and $2.73 per share, with Chief Financial Officer David Denton explaining, "the weak economy has had a dampening impact on prescription utilization and consumer behavior across the retail pharmacy sector." CVS also added that its famous feud with Walgreen Company (WAG) did not have an adverse effect on its sales.
However, despite its lackluster earnings report, CVS also said it signed a new long-term contract with Aetna Inc. (AET). The deal is seen as a boost for CVS' beleaguered pharmacy benefits management business. The 12-year deal will include the management of 9.7 million AET pharmacy members and administer roughly $9.5 billion in annual drug spending. Traders reacted positively to this news, as the shares are up roughly 4.25% today, to around $31.90.
Today's technical boost has catapulted CVS above its 10-week moving average for the first time since May. This intermediate-term trendline -- currently docked around $31.50 -- has provided both support and resistance to CVS in the past. CVS has not closed a week above this important moving average since April 30.
Option players have crowded CVS today, with nearly 24,000 contracts traded by midday -- four times the equity's expected single-session volume. Calls have been especially popular, with roughly 13,000 contracts traded so far.
The August 33 call has been a popular pick today, with 1,429 contracts traded -- more than half at the ask price, suggesting they were likely bought. With volume exceeding open interest at this strike, we'll have to wait until tomorrow to confirm whether these are fresh positions. However, if these calls were indeed bought to open, then it seems that traders are counting on CVS' rally to continue in the weeks ahead.
Meanwhile, the August 30 put has seen volume of 2,108 contracts traded -- 79% at the bid price. With CVS trading right around $32, these puts may have been sold to open by bullish-to-neutral traders counting on this round number to provide a floor for the stock in the weeks ahead.
In fact, the August 30 strike lays claim to peak put open interest of roughly 18,000 contracts. Going forward, this heavy accumulation of put open interest could very well provide options-related support for CVS. For the record, peak call open interest of around 18,000 contracts can be found at the August 36 strike.
Option players are generally bearish toward the struggling retailer, as indicated by CVS' Schaeffer's put/call open interest ratio (SOIR) of 1.13, in the 67th annual percentile. Echoing this bearish sentiment, short interest grew by 13.5% during the most recent reporting period, indicating that some traders were perhaps counting on a post-earnings slide for CVS.
Despite what could be viewed as a downbeat earnings report, CVS has shot above technical resistance for the first time in months. A weekly close above its 10-week trendline could be the medicine CVS needs to spook the bearish holdouts, helping the stock continue its recent rally.
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