To The Moon

$Chewy, Inc.(CHWY)$ , a prominent player in the pet supplies industry, is set to announce its earnings this Wednesday, August 30, 2023, after the market closes. With recent fluctuations in its stock price and a slew of economic indicators, investors are faced with the question of whether now is the right time to consider buying the dip on Chewy's stock.

Recent Performance and Technical Indicators:

Chewy's stock has been experiencing a downward trend, hitting a 52-week low of $25.29. Interestingly, the last time Chewy traded at this level was in May 2022. This could signal either a potential support level or a bearish trend continuation, depending on the upcoming earnings report.

Daily Chart

The Relative Strength Index (RSI), a technical indicator used to measure the magnitude of recent price changes, is flashing oversold signals for Chewy. Its 14-day RSI stands at 17, indicating that the stock might be due for a reversal. However, the weekly RSI at 33 suggests that the overall trend might still have room for further downside movement. If we use the previous low of 22.2 in May 2022, there is still room for Chewy to drop if the earnings report is disappointing.

Weekly Chart

Market Context and Economic Impact:

A notable development that might impact Chewy's performance is the recent performance of $Petco Health and Wellness Company, Inc.(WOOF)$, which saw a 20% decline after reporting Q2 FY23 results and revising its FY24 EPS outlook. This outcome is a red flag for Chewy, as it operates in a similar market providing pet products and services. Given this precedent, investors may approach Chewy's earnings report with caution, anticipating potential repercussions on its stock price.

Earnings Consistency and Economic Uncertainty:

Chewy has demonstrated a track record of consistently surpassing consensus EPS estimates over the last four quarters. However, the current economic climate introduces uncertainty that could impact companies like Chewy. While Chewy's products could be viewed as consumer staples for existing pet owners, the uncertain economic outlook might discourage potential new pet owners and existing ones from increasing their pet count. This dynamic could affect Chewy's revenue growth potential in the near term.

Analyzing the Put Option Strategy:

For investors seeking a more adventurous approach, selling put options before the earnings announcement could be considered. This strategy leverages the higher implied volatility around the earnings event. Specifically, let's examine the prices of out-of-the-money put options that have piqued interest:

• Put option at a strike price of 20, expiring this Friday, last traded at 0.16, representing a premium of about 23%.

• Put option at a strike price of 22, expiring next Friday, last traded at 0.51, also representing a premium of about 16.5%.

Cash Covered Put Options Explained:

A cash covered put option involves selling a put option while having enough cash on hand to cover the potential purchase of the underlying stock if the option is exercised. In this case, by selling the put options with a strike price of 20, the investor is essentially agreeing to buy Chewy's stock at $20 per share if the stock price falls below this level before the option's expiration.

Should the stock price remain above the strike price, the investor keeps the premium received from selling the put options. If the stock price drops significantly and the put option is exercised, the investor buys the stock at the strike price, which could be considered a favorable entry point if they believe in Chewy's long-term potential.

Conclusion:

The upcoming earnings report for Chewy holds significant implications for its stock price. The recent technical indicators, market context, and economic uncertainty all contribute to the complexity of predicting Chewy's immediate future. While the potential for a quick profit through buying the dip exists, investors should carefully weigh the risks associated with the uncertain economic environment. Additionally, the cash covered put option strategy offers a unique approach for those who are willing to take on a more adventurous position.

Please share your thoughts on Chewy and if it will drop further with the coming earnings report. Thank you for reading.

@CaptainTiger

@MillionaireTiger

@TigerStars

@Daily_Discussion