Pre-Earnings Volatility Expectations Peak on Finish Line Stock

FINL's 30-day at-the-money implied volatility hit an annual high earlier

Sep 21, 2017 at 1:29 PM
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Athletic apparel retailer Finish Line Inc (NASDAQ:FINL) will take its late-season turn in the earnings confessional tomorrow morning. FINL stock has a history of making big post-earnings swings in either direction, and one options trader today is betting on a repeat performance -- and paying a pretty penny to do so.

FINL Options Traders Have Been Targeting Puts

So far today, 45,870 options have traded on FINL -- just surpassing yesterday's 52-week high of 45,028 contracts exchanged in a single session. The bias is toward puts, with 44,112 puts on the tape compared to fewer than 2,000 calls. In fact, put volume is at a new 12-month high, running at 37 times the expected intraday rate.

According to Trade-Alert, most of the action appears to be the result of one trader initiating a butterfly spread in the front-month series. Specifically, it looks as if a spread strategist bought to open symmetrical 10,000-contract blocks of October 7 and 9 puts, while simultaneously selling to open 20,000 October 8 puts. If this is the case, the speculator expects FINL stock to settle right at $8 at the close on Friday, Oct. 20 -- when the options expire -- roughly 13.4% below current trading levels.

And while the sold puts help to offset the cost of the bought puts, the options market is pricing in extremely elevated volatility expectations ahead of tomorrow's earnings event. In fact, FINL's 30-day at-the-money implied volatility topped out at a 52-week peak earlier, and was last seen at 81.9% -- pacing in the 99th annual percentile.

More broadly speaking, pre-earnings options traders have taken a decidedly bearish path toward FINL. Over the past five trading days, the October 8 put has seen a significant rise in open interest, with 15,123 contracts added. Data from Trade-Alert indicates the bulk of this activity occurred on Monday, and came at the hands of buyers. In other words, traders are betting on FINL breaching $8 over the next several weeks.

Wall Street is Generally Skeptical of Underperforming FINL

This skepticism is seen outside of the options pits, too. Short interest has nearly doubled since mid-May to 11.76 million shares -- the most in at least 15 years. Plus, 15 of 17 covering analysts maintain a "hold" or worse rating on the shares.

None of this is too surprising, though, given Finish Line's disastrous technical performance. Year-over-year, the shares have surrendered more than 61% -- and hit an eight-year low of $6.90 on Aug. 29, after the Nike rival issued a full-year profit warning. Today, FINL stock is down 1.5% to trade at 9.29.

Historically speaking, the stock has finished lower in the session subsequent to reporting in five of the past eight quarters. On average, though, FINL shares have posted a single-day post-earnings swing of 11.6%, regardless of direction. This time around, the options market is expecting Finish Line stock to move 18.7% in tomorrow's trading.

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