And you guys thought I forgot about the ol’ Triangle of Death. Well, here is a poster child for the formation, ANF. Probably one of the worst stock charts that I have seen in years. The six year chart below shows this morning’s intra-day fresh five and a half year low:
Despite the stock’s 4% gains following this morning’s weak sales and poor outlook, the stock is down 12% on the year, and 35% from the 52 week highs made in late August. There is little to extrapolate from ANF’s problems to broader retail, outside the trainwreck that is the entrie teen retrail space (AEO and ARO that are down 45% and 90% from their five years highs and URBN recently faltering). ANF since late 2011, like its peers has made a series of lower highs and lower lows, massively underperforming the broad market and the XRT.
So is today’s reversal in ANF off of five year lows on bad news THE bottom?? On a near term basis, the stock is severely oversold, and with 30% short interest, I am not sure there is anyone left to sell it, as the stock had already had a high volume 17% drop following their Nov 7th pre-announcement. So for now, if the stock were able to establish a new range above $30, it could make sense to play for a gap fill back to $35:
With two earnings related events in the last month, and no new news expected until late February when they report their Q4 options prices are likely to settle in a bit more. 30 day at the money implied vol has come in from 52 week highs made after the Nov 7th pre-announcement but probably comes in to about 30% in the coming weeks:
If I were inclined to play for a gap fill into the new year I would consider buying a call butterfly in January:
With the stock around $29, the Jan 30 33/36 call fly can be bought for a bout .50, making the break-even at 30.50, max gain of 2.50 with gains of up to 2.50 between 30.50 and 35.50. Max risk is .50 below 30 and above 36.
Why would I use options? Well that chart, while oversold, looks like $30 could become massive long term resistance, and the next real support is somewhere in the mid $20s:[caption id="attachment_48649" align="aligncenter" width="600"] ANF 7yr chart from Bloomberg[/caption]
So the butterfly is essentially acting as a stock alternative with the very real possibility that the stock exits the triangle of death and heads lower. If that’s what you think will happen then what’s the trade? Well I would probably want to finance owning longer dated downisde puts, but giving myself some room to the downside in near term.
With the stock around $28.85 I would look to buy the Jan / May 27 Put Calanedar for about $1.45. Selling 1 of the Jan 27 puts at .65 and Buying 1 of the May 27 puts for about 2.10. The max risk is the premium paid and would be at risk on a massive move higher or lower than 27 on jan expiration. The ideal scenario is that the stock is at or near 27 on Jan expiration and having the Jan short leg expirining worthless. At that point I would look to turn into another calendar by maybe selling a downside put in Feb expiration or a vertical put spread by selling a lower strike put in May, further reducing my break-even.