Stocks quoted in this article:
The 20 stocks listed in the table below are the S&P 400 MidCap Index (MID) components that have attracted the highest total options volume during the past 10 trading days. Names highlighted are new to the list since the last time the study was run, and data is courtesy of Schaeffer's Senior Quantitative Analyst Rocky White. One name of notable interest today is retailer Abercrombie & Fitch Co. (NYSE:ANF), which has seen accelerated options volume in the wake of a lackluster earnings showing.
Abercrombie & Fitch Co. was last seen 4.7% lower at $41.94, after the firm reported a tenth consecutive drop in quarterly same-store sales. In addition, the company reported slimmer-than-expected second-quarter sales, and announced plans to phase out its logo-focused clothes.
In the wake of its earnings report, ANF is experiencing a volatility crush, as its 30-day at-the-money implied volatility hit a 52-week low, and was last seen down 32.3% at 29.3%. Overall options volume is running at about four times the intraday norm, with buyers and sellers wheeling and dealing amid the stock's plunge.
It looks like one speculator may be taking advantage of ANF's relatively cheap options to gamble on more volatility in the short term. Symmetrical blocks of 2,000 contracts traded at the September 40.50 put and September 41.50 call, both flagged as "opening." With the bid/ask spreads so wide, it's difficult to discern whether the contracts were bought or sold to open, so we'll take a look at both scenarios.
Assuming the contracts were bought, the long strangle was established for a net debit of $2.06 per pair of contracts ($0.73 per put, $1.33 per call). This represents the trader's maximum risk, should ANF remain between the strikes through the close on Friday, Sept. 19, when front-month options expire. The investor's profit will increase the lower ANF sinks beneath $38.44 (put strike minus net debit) or the higher ANF soars beyond $43.56 (call strike plus net debit).
From the security's current perch, it would take a downside move of 8.3% in order to breach the lower breakeven rail. On the upside, meanwhile, ANF would need to rebound 3.9% to hit breakeven.
Now, assuming the blocks were sold to open, the speculator established a short strangle for a net credit of $2.06 per pair of contracts, which represents the maximum reward on the play. More specifically, the trader can pocket the initial premium received if ANF settles between the strikes at September options expiration, and can retain at least part of the net credit as long as ANF stays between the aforementioned breakeven rails. Should the stock move outside of this comfort zone, the investor's losses will accumulate.
Considering the aforementioned volatility crush, now may not be the best time to sell short-term options on Abercrombie & Fitch Co. (NYSE:ANF). Furthermore, with the shares making a major move, it's risky to bet on a range. As such, the aforementioned strangle was likely of the long variety, as the combination of a relatively low cost of entry and a volatile stock makes for an appealing risk/reward setup.