Is It Time to Shop for Abercrombie & Fitch Co. (ANF) Options?

The options market is pricing in historically low short-term volatility expectations for Abercrombie & Fitch Co. (ANF)

Apr 5, 2016 at 1:27 PM
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Retail interest Abercrombie & Fitch Co. (NYSE:ANF) is 2.5% lower at $31.08, as retail stocks dip in the wake of Pacific Sunwear of California, Inc.'s (NASDAQ:PSUN) alleged bankruptcy plans and a broader market swoon. However, ANF has enjoyed an impressive start to 2016, up 15% year-to-date. In fact, the shares are now testing support in the $30-$31 region -- a roughly 50% retracement of ANF's August 2014 high north of $45 to its nearly eight-year low of $15.42 in August 2015. What's more, ANF could go higher if the bears hit the bricks -- and now might be an opportune time for option buyers to go bargain hunting. 

While ANF has outperformed the broader S&P 500 Index (SPX) by nearly 19 percentage points over the past two months, analysts have yet to move away from their pessimistic positions. The equity has seen at least a dozen price-target increases since early March, but the average 12-month price target of $28.80 sits at a discount to the stock's current value. Moreover, 14 out of 20 brokerage firms maintain "hold" or worse ratings, leaving plenty of room for future upgrades.

Short interest on ANF has also been running high. While these bearish bets have declined by 20% during the most recent two-week reporting period, they still account for more than one-quarter of the security's total float -- indicating plenty of buying power left on the sidelines that could propel the shares higher.

In the option pits, traders have been betting heavily against ANF, buying to open nearly two puts for each call over the last 50 days on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). What's more, the resulting put/call volume ratio of 1.98 is higher than 88% of all readings in the past year.

Today's action looks like more of the same -- ANF puts are changing hands at 1.6 times their typical intraday rate, outnumbering calls nearly 2-to-1. The most active option so far is the August 28 put, where it appears new positions are being bought to open. Buyers of this put are expecting ANF to fall back below the $28 level before the option's expiration on Aug. 19.

As alluded to earlier, this could be a prime time to pick up ANF's near-term options, as premiums are relatively cheap. The stock has a Schaeffer's Volatility Index (SVI) of 33%, in just the third percentile of its annual range. That means the options market is currently pricing in historically low short-term volatility expectations for Abercrombie & Fitch Co.(NYSE:ANF). Likewise, the equity's 30-day at-the-money implied volatility sits at 35.7% -- higher than just 8% of all other readings from the past year.

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