3 Retail Stocks Having a Fire Sale on Options

Near-term options buyers can score a bargain on Abercrombie & Fitch, Costco, and Dillard's

Mar 22, 2017 at 12:09 PM
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The current earnings season is winding down, and the broad market has been enjoying months of historically low volatility. As such, options on many stocks have been pricing in muted volatility expectations, making them bargain buys. Today, we'll narrow in on the retail sector, including Abercrombie & Fitch, Costco, and Dillard's. Here's a quick look at attractive options buying opportunities on ANF stock, COST stock, and DDS stock.

Analysts, Traders Expect More Losses for ANF Stock

ANF stock has been sliding down the charts, losing 64% over the past 12 months, including a 3.4% drop to $11.04 today. In fact, the shares matched their late-January 16-year low of $10.91 earlier in the session. As such, it's not surprising sentiment is stacked against the retailer, with 16 out of 18 analysts rating ANF stock a "hold" or worse, and more than 27% of its total float wrapped up in short interest.

Options traders have also been pessimistic, buying to open puts over calls at near-extreme rates. In fact, ANF's 50-day put/call volume ratio on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) of 2.39 ranks just 1 percentage point from an annual high. Near-term speculators are similarly put-heavy, with the equity's Schaeffer's put/call open interest ratio (SOIR) of 1.74 docked higher than 97% of the past year's readings.

Buyers of short-term ANF options could find an unusually good deal at the moment. With a Schaeffer's Volatility Index (SVI) of 40% -- in the low 11th annual percentile -- premium is pricing in muted volatility expectations for ANF stock. What's more, a Schaeffer's Volatility Scorecard (SVS) of 81 indicates Abercrombie & Fitch has made larger moves over the past year, compared to what the options market has priced in.

New Delivery Service Has COST Stock Edging Higher

COST stock is shaking off the broad-market slump -- up 0.6% at $167.82, widening its year-over-year lead to 9.3% -- on news of a delivery service partnership. The shares tapped a record high earlier this month, and have since pulled back to support above the 60-day moving average. Analysts seem to be expecting more highs ahead, with over two-thirds of following firms doling out a "buy" or better recommendation, while not one calls COST a "sell."

Among near-term options traders, puts are the options of choice, per the security's SOIR of 1.58 -- in the 99th percentile of its annual range. That doesn't necessarily mean speculators are bearish, however. Across the ISE, CBOE, and PHLX, the stock has seen 1.51 puts sold to open for each one bought over the past two weeks.

It's a much more appealing time to buy short-term COST options than to sell them, though. With an SVI of 15% -- lower than 86% of the past year's readings -- COST stock is offering near-term options at a bargain, from a volatility standpoint. Plus, an SVS of 91 suggests Costco shares have outperformed the volatility expectations that have been priced into their options over the last 12 months.

DDS Stock Slides to Fresh Low

Off 2.6% at $46.80 today, after earlier notching a five-year low of $46.62, DDS stock has given back 43% of its value over the past 12 months, with the 10- and 20-day moving averages pressuring the shares lower in recent weeks. As such, not a single brokerage firm currently recommends buying the stock. And short interest is at its highest level in more than a year, accounting for nearly one-third of DDS' total float.

Options traders have certainly taken a glass-half-empty approach, as well, though amid light absolute volume. More than nine DDS puts have been bought to open for every call over the past 10 weeks on the ISE, CBOE, and PHLX -- with a put/call volume ratio of 9.48 ranking in the bearishly skewed 94th annual percentile. Echoing this, the stock's SOIR of 1.27 is just 5 percentage points from a 12-month peak.

Regardless, premium on DDS stock is pricing in historically low volatility expectations, per the SVI of 38% -- in the low 15th percentile of its annual range. And an SVS of 86 means the options market has underpriced Dillard's ability to make outsized moves over the past year, making short-term DDS options a relative bargain.

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