Put buyers are eyeing a downside post-earnings move for URBN
Apparel retailer Urban Outfitters, Inc. (NASDAQ:URBN) will report quarterly earnings after the market closes tomorrow. The shares are down 0.8% a $25.86 today, as traders digest a price-target cut to $26 from $32 at Wunderlich, and URBN's options pits are buzzing, with speculators paying hefty premiums to place pre-earnings bets. The stock has a history of making huge moves in the session after reporting, and traders seem to be expecting a swing lower for the shares on Wednesday.
Beginning with URBN's earnings history, the stock has made the same number of moves higher and lower in the post-earnings session over the past eight quarters, with an average swing of 11.2% in either direction. But the upside moves have tended to be even larger, with the average one-day gain clocking in at 14.2%, compared to an average loss of 8.2%. At the moment, options traders are eyeing a wider-than-average swing, pricing in a move of 15.5%.
The stock's options pits are busy today, too, with URBN puts changing hands at four times the typical intraday rate. Specifically, it looks like speculators may be purchasing new positions at the weekly 3/10 22- and 26-strike puts, betting on the shares to slide through the end of the week, when the series expires. As expected ahead of potential volatility catalyst, options buyers are paying up for their positions today, with URBN's 30-day at-the-money implied volatility of 53% seated 8 percentage points from an annual high -- suggesting unusually large volatility expectations are being priced in ahead of earnings.
Broadly speaking, today's preference for long puts is nothing new. In fact, while the stock's absolute options volume is relatively light, URBN's 10-week put/call volume ratio of 3.41 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) not only indicates puts have been bought to open at more than triple the rate of calls over the period, but also represents an annual bearish peak.
Outside of the options arena, expectations are likewise low, with 12.2% of URBN's total float dedicated to short interest. At the stock's average pace of trading, it would take more than a week for short sellers to cover all these bearish bets. Meanwhile, two-thirds of the analysts tracking URBN rate the shares a "hold" or "strong sell." Simply put, a positive surprise in the earnings confessional could potentially result in a huge shift in sentiment, which could be a boon for the shares.
Given the stock's technical performance, though, the current bearish setup is hardly surprising. The shares have shed 36.6% from their mid-November highs, and have underperformed the broad S&P 500 Index (SPX) by more than 28 percentage points over the last three months. Plus, Urban Outfitters, Inc. (NASDAQ:URBN) shares have spent the past several weeks running into resistance at their declining 50-day moving average, though they're now testing the waters in the $25-$26 area, which contained mid-2016 pullbacks.
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