Abercrombie & Fitch Options Premiums Spike Ahead of Earnings

ANF stock remains a long-term laggard

Managing Editor
Aug 23, 2017 at 3:10 PM
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Retailer Abercrombie & Fitch Co. (NYSE:ANF) is set to report second-quarter earnings tomorrow morning. It's been a bearish trend for the retail sector during this earnings season, though ANF rival American Eagle Outfitters (NYSE:AEO) surprised many today with an upbeat report. Abercrombie stock has historically had success in post-earnings sessions, too. Below, we will break down ANF stock's post-earnings history, and examine how options traders are trading the retailer ahead of the quarterly event.

The retailer has averaged a one-day move in either direction of 13.9% in the session following its last eight earnings releases. Furthermore, this move has been positive five of the last eight times, including a 9% pop back in May. This time around, the options market is pricing in an even bigger 18.8% swing for tomorrow's trading. 

Another post-earnings rally would be just what the doctor ordered for ANF. While the retail stock is currently up 5.2% to trade at $9.63 on AEO-inspired tailwinds, it's still down 20% year-to-date. Plus, the shares have faced increased pressure from their 30-day moving average since a July 10 bear gap brought on by abandoned buyout talks, and hit a 17-year low of $8.81 on July 12.

Looking at the options pits, short-term options traders are more call-skewed than usual toward the stock. This is evidenced by the ANF's Schaeffer's put/call open interest ratio (SOIR) of 0.63, which is just 1 percentage point from a 12-month low.

Drilling down, peak open interest of 6,928 contracts is found at the September 10 call, and data points to a mix of buy- and sell-to-open activity here in recent months. Those buying the calls expect a breakout into double-digit territory by options expiration at the close on Friday, Sept. 15, while those writing the calls expect $10 to serve as a ceiling for the shares.

Regardless, now appears to be a more attractive time to sell premium on short-term ANF options, as opposed to buy it. Ahead of earnings, the stock's 30-day at-the-money implied volatility hit a 52-week peak earlier, last seen at 70.4% -- in the 97th annual percentile, meaning elevated volatility expectations are being priced in.

Sentiment is noticeably skeptical elsewhere on Wall Street. Of the 14 brokerages covering ANF stock, 13 rate it a "hold" or worse. Plus, short interest surged 38.1% in the two most recent reporting periods to 19.8 million shares -- the most since April.

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