Buy the Dip on Outperforming Urban Outfitters Stock

Options traders have been put-heavy over the past two weeks

Managing Editor
Jul 10, 2018 at 12:53 PM
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Shares of retail concern Urban Outfitters, Inc. (NASDAQ:URBN) are slightly lower this afternoon, down 0.7% at $45.49, after receiving a downgrade to "sector weight" from "overweight" at KeyBanc. From a broader perspective, however, URBN has been a long-term outperformer on the charts, not unlike its sector peer Tailored Brands (TLRD). The stock recently touched a fresh record high of $48.24 on June 13, and have picked up a whopping 156% over the past 12 months.

And despite Urban Outfitters stock's slight pullback to within one standard deviation of its 40-day moving average, Schaeffer's Senior Quantitative Analyst Rocky White says this retreat could be a buying opportunity. This is evidenced by the nine other times over the last three years where URBN has pulled back to this trendline after trading above it for a significant length of time. Following those nine prior signals, the stock went on to average a gain of 8.59% over the next month. 

Daily Chart of URBN Since July with 40MA

In the options pits, data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows URBN's 10-day put/call volume ratio of 7.44 in the 82nd percentile of its annual range. This suggests that over the past two weeks, puts have been bought to open over calls at a faster-than-usual clip -- leaving plenty of room for call buyers to once again enter the ring.

Continued short-covering activity could help support another 40-day bounce for Urban stock. Short interest rose 23% during the past two reporting periods, and now represents more than 14% of the total available float. At URBN's average daily trading volume, it would take less than a week for shorts to cover their bearish bets.

Lastly, options are attractively priced for the security. This is according to its Schaeffer's Volatility Index (SVI) of 36%, which ranks in the low 6th annual percentile. This reading suggests short-term calls and puts have priced in lower volatility premiums only 6% of the time during the past year.

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