Abercrombie & Fitch Options Pricing In Another Big Earnings Move

Abercrombie & Fitch reports earnings tomorrow morning

Managing Editor
Mar 6, 2018 at 11:25 AM
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Abercrombie & Fitch Co. (NYSE:ANF) is expected to report fourth-quarter earnings before the open tomorrow. Overall, ANF stock has turned in a solid year on the charts, already adding 19% in 2018. At last check, the shares were down 0.8% at $20.52, but if past is precedent, the retail stock could be gearing up for a big move following the report tomorrow. 

In terms of earnings reactions, Abercrombie & Fitch stock ended higher the day after reporting in each of the past four quarters, including a 23.9% burst last November, and a 13.9% jump last March. Looking back eight quarters, the shares have averaged a move of 14.8% in either direction in the session after the company reports.

For this particular quarterly report, the options market is pricing in a much larger-than-usual 21% swing for Wednesday's trading, going by implied volatility (IV) data. An upside move of that magnitude would put ANF stock above the $24 level for the first time since May 2016, while a downside move would put the shares around $16.21 -- an area that represents a 50% Fibonacci retracement of ANF's rally off its July lows to its annual high of $23.53 touched Jan. 23.

It looks like recent options buyers may be betting on Abercrombie to extend its earnings win streak. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows ANF with a 10-day call/put volume ratio of 3.34, which ranks 2 percentage points from a 52-week high. Given the amount of short interest tied up in the stock, though, it's possible some of this call activity -- particularly at out-of-the-money strikes -- could be short sellers initiating an options hedge against any earnings-induced upside.

Although short interest fell 2.7% during the most recent reporting period, these bearish bets still represent nearly 22% of the stock's total available float, or six days' of pent-up buying power, at ANF's average daily trading volume. Should Abercrombie extend its earnings win streak, a short squeeze could add fuel to the security's fire.

The analysts following the equity also harbor low expectations, as 11 out of 14 following the retailer sport "hold" or worse recommendations. A positive earnings reaction tomorrow could prompt a round of upgrades for outperforming ANF shares.

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