Rent-A-Center (RCII) is set to report earning after the close Monday, Oct. 30. I’m buying call options in anticipation of a better-than-expected report and for the stock to squeeze out the massive short interest.  

Now that I’ve told the punch line, here’s the setup.

The company operates over 1,400 retail stores that offer home furnishing products, from couches and beds to appliances and TVs, either on a rental or a lease to own basis.

It’s a business that targets (preys upon) a lower income customer base and makes most of its money by charging above-market interest on the credit they extend.

And similar to the payday loan industry such practices came under regulatory scrutiny a few years ago, causing a contraction in lending and margins.

Combined with general pressure physical retail and RCII’s lack of online sales, the company is expected to post its third loss over the past four quarters. And it’s easy to see why; shares are down some 75% over the past two years.

Here are some other positives:

• The stock is near support at the $9.50 level.
• A dividend cut, rumored on Friday, is now priced in.
• Revenues held flat and lending and operating income have turned back up, as unfortunately renting/leasing at high rates is still the only option for many people.
• Short interest is now a whopping 61% of the float.

Rent-A-Center is based in and has most of its locations in Texas. It is once again positioned to benefit from others’ misfortune, as flood victims are forced to find fast and affordable (at least in the short term) replacements for damaged appliances and furniture.

All this adds up to a lot of bad news being priced into the stock and is setting the shares up for a nice short squeeze when the company delivers better than expected numbers.

THE TRADE:

I am purchasing from the Nov. 10 call options for $0.50 per contract.

My target is for the stock to rally above the $11 level and for the calls to be worth more than $1 for a 100% gain.

 Related: Here’s How to Calculate a Stock’s Volatility.