L Brands Inc (LB) Premium Buyers Could Score a Black Friday Bargain

The options market is pricing in low volatility expectations for L Brands Inc (NYSE:LB), a potential boon for short-term options buyers

Nov 23, 2016 at 12:24 PM
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Skepticism is steep toward L Brands Inc (NYSE:LB), which shouldn't be too surprising considering the retail stock is down more than 23% year-to-date. However, LB stock has been making technical strides since hitting its most recent low of $62.70 on Nov. 9, with the shares adding back 14.2%. Today, amid a historically bullish week for retailers, LB stock is up 0.1% at $71.59 -- within striking distance of filling its early-November bear gap. Considering the retail shares have tended to turn in a strong post-Black Friday performance, too, now may be the time for short-term options buyers to strike.

Drilling down on LB's sentiment backdrop reveals put buyers have been busy in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculative players have bought to open nearly 1.94 puts for each call in the past 10 sessions. What's more, this ratio ranks in the slightly elevated 63rd annual percentile.

This put-skewed stance is also seen in LB's top-heavy Schaeffer's put/call open interest ratio (SOIR) of 1.31. In other words, puts easily outnumber calls among options expiring in three months or less. Plus, this ratio ranks higher than 69% of all comparable readings taken in the past year. Should LB continue its recent rally, an unwinding of these bearish bets could translate into near-term tailwinds for the shares.

Outside of the options arena, short interest edged higher in the most recent reporting period to 9.6 million shares. At LB's average pace of trading, it would take almost seven sessions to cover these bearish bets. Plus, nearly 70% of analysts maintain a "hold" or worse rating on the stock. A round of short-covering and/or some bullish brokerage notes could help fuel a bigger bounce for LB.

And while it's important to not discount the equity's longer-term technical troubles, now does appear to be an opportune time to buy premium on the retail stock's near-term options. Specifically, L Brands Inc's (NYSE:LB) Schaeffer's Volatility Index (SVI) of 23% ranks lower than 92% of all comparable readings taken in the past year, while its 30-day at-the-money implied volatility of 23% rests in just the 8th annual percentile. Summing it all up, low volatility expectations are currently priced into LB's short-term options -- a potential boon to premium buyers.

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