Staples, Inc. (SPLS)

In last week's edition of Trading Tools, the prospects for WellPoint, Inc. (WLP - Analyst Report) was examined, as the insurance issue appeared on the Zacks Unusually High Option Volume screener. Utilizing the same filter today, another equity piqued my interest: Massachusetts-based office supply store Staples, Inc. (SPLS - Snapshot Report).

When searching for a bullish pick, we like to see heavy skepticism toward an outperforming stock, as this leaves ample room for upgrades or other positive catalysts to fuel the stock higher. When searching for a bearish pick, on the other hand, contrarians are looking for significant bullish sentiment toward an underperforming stock, as we believe an excess of optimism is a sign that everyone has already bought into the stock and sideline money is virtually tapped out.
Nevertheless, keep in mind that some optimism and pessimism is genuinely warranted and isn't always a contrarian indicator – like an outperforming stock with many "buy" ratings or an underperforming stock with a plethora of "sell" ratings.

On Thursday, bullish bettors bombarded Staples in the options pits, as the security saw more than 10,000 calls cross the tape. Compared to the equity's average daily volume of fewer than 2,000 calls, Thursday's unusually high volume stood at more than 5 times the norm.

The onslaught of optimistic activity echoes the recent trend on the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE). During the past couple of weeks, speculators on the ISE and CBOE have scooped up about 4.5 times more calls than puts on SPLS. What's more, this lofty ratio registers in the 91st percentile when compared to similar readings taken during the past year, suggesting that options players on the exchanges have been more bullishly biased toward SPLS less than 10% of the time during the past 52 weeks.

The recent preference for calls is further demonstrated by the office supply sultan's descending Schaeffer's put/call open interest ratio (SOIR), which measures options slated to expire within 3 months. On Feb. 20, Staples' SOIR stood at 1.48, in the 38th annual percentile. However, as call volume increased at a faster pace than put volume, the stock's SOIR has fizzled to 1.07, in the 29th annual percentile. In other words, short-term options players have been more optimistically aligned toward SPLS less than a third of the time during the past year.

So, why are options bettors gravitating toward the bullpen?

Speculators could be placing their bets ahead of Staples' looming date in the earnings confessional. The company is expected to report fourth-quarter and fiscal-2008 earnings ahead of the bell on Wednesday, March 11.

Technically speaking, the swelling in optimistic option activity stands in stark contrast to the stock's recent performance on the charts. Since perforating support in the 20-to-22 neighborhood in October 2008, the shares of SPLS have tumbled roughly 28% beneath resistance from their 10-week and 20-week moving averages.

From a longer-term perspective, the equity is now attempting to find a foothold in the 14-to-15 region. This area acted as resistance during 2002 and 2003, and could now switch roles and play the part of support.

However, despite Staples' technical troubles of late, options traders aren't the only group with high expectations. The stock currently harbors an impressive 7 "strong buys" and 2 "buy" ratings, according to Zacks, compared to 1 lukewarm "hold" and a lone "strong sell."

In conclusion, the swelling of optimism surrounding Staples could potentially sting the stock in the near term, should the company's upcoming earnings release miss expectations. A weaker-than-expected profit could send the lingering bulls in both the options arena and among the brokerage bunch running for cover. A reversal in sentiment in the options pits, or a round of downgrades and/or price-target reductions, could pressure SPLS beneath potential support, further exacerbating the stock's losses.