There was an options trade in shares of Tiffany’s (TIF) this morning that caught my eye…
When the stock was $76.50 shortly after the opening, a trader sold the Feb 85 / May 80 call spread 3,000x at $3.03. It appears the trader bought to close 3,000 Feb 85 calls for 55 cents and sold to open 3,000 May 80 calls at $3,58. This is a trader likely rolling down an overwrite of long stock.
An overwrite is a yield enhancement strategy where an investors sells 1 call against 100 shares of stock. If the stock is below the call strike sold on the expiration of the option then the investor would collect the premium received for the call sale. The premium could either add yield to the long stock position, or serve as a buffer to the downside equal to the premium revived. This strategy should not be confused with options strategies meant to define risk or meaningfully mitigate risk as the strategy actually limits potential upside. There are two worse case scenarios, first that the stock sells off dramatically and the premium sale does little to nothing, which is a risk that any holder of a stock has. Secondly, if the stock were to rocket through the strike of the call sale, then the profit of the stock would be capped at the strike price.
Back to TIF, it appears that after the stocks, late 2016 move to $85, and its subsequent rejection resulting in a 10% decline since the mid Dec 52 week highs, that the trader is using this volatility to roll the overwrite. The roll offers a $3.03 buffer the downside, and a call-away level at $83.03, up 8.5% from the trading level on May expiration.
TIF has decent near term technical support between $75 and $70, and solid resistance back near the prior 52 week highs at $85:[caption id="attachment_69347" align="aligncenter" width="600"] Bloomberg[/caption]
The next identifiable catalyst for TIF will be their fiscal Q4 results due in mid to late March. While U.S. dollar strength will clearly be a headwind with 55% of their sales from outside the U.S. I would note that the U.S. Dollar Index (DXY) is only up about 1% since they last guided on Nov 29th.