by Joseph Hargett | March 13, 2012 11:37 am
Options traders weren’t expecting much out of specialty clothier Urban Outfitters’ (NASDAQ:URBN) fourth-quarter earnings report. Volume was skewed heavily toward the put side of the spectrum ahead of last night’s release, with nearly 14,400 of these typically bearish contracts changing hands on Monday, compared to call volume of roughly 10,200 contracts. With the stock trading down nearly 5% so far today, expectations were apparently not low enough.
Monday’s put activity was concentrated at the out-of-the-money March 28 and 29 strikes, with nearly 5,000 contracts trading on each. Open interest on the March 28 put rose to 7,419 contracts from 5,990 contracts, while the March 29 strike saw 3,865 puts added, with open interest rising to 5,026 contracts.
Overall, URBN’s put/call open interest ratio for the front three months of options arrives at 1.83, according to data from Schaeffer’s Investment Research. In other words, there were nearly two puts open for every one call open among near-term options prior to Urban Outfitters releasing its fourth-quarter earnings report.
Put-heavy options traders appear to be in good shape after last night’s trip to the earnings confessional. Urban Outfitters reported that its fourth-quarter earnings fell 48% to $39.3 million, or 27 cents per share, from $75.2 million, or 45 cents per share, in the same quarter last year. What’s more, the results fell three cents shy of the consensus estimate for earnings of 30 cents per share.
Sales were a bright spot, rising 9% to $731 million, compared with the same quarter last year, but same-store sales fell 1% for the period. But gross margin was the real shocker for investors, falling to 30.1% in the fourth-quarter from 39.7% a year ago.
“I am pleased that we managed our inventories to appropriate levels at year end even though our margins during the quarter suffered as a result,” said Urban Outfitters CEO Richard Hayne in a conference call.
From a technical standpoint, it may be too late for options traders to jump on the short-term bearish bandwagon. While URBN is down sharply (roughly 5%) in the wake of its quarterly report, the stock appears to have found support in the $27.50 area – a region that has long been home to support and resistance for the equity.
What’s more, URBN’s 50-day and 200-day moving averages are perched just below $27.50, creating an additional layer of technical support. Also note that these trendlines recently completed a bullish cross, also known as a Golden Cross, hinting at a potential resumption of URBN’s current rally after the reaction to last night’s earnings plays out.
Buying puts on URBN, at this point, would be akin to catching a falling knife, and call buying may be a bit too risky for some options traders – after all, the stock has yet to prove it will continue higher after today’s selling abates. With what appears to be solid technical support just below the shares, options traders may want to consider a bull put spread on URBN.
At last check, the April 27-strike put was bid at 75 cents, while the April 26 put was asked at 55 cents, resulting in a total credit of 20 cents, or $20 per pair of contracts, for the bull put spread. The maximum profit is equal to the credit received and is achieved if URBN remains above $27 through April expiration. In this example, losses are limited to 80 cents (the difference between strike prices, less the initial credit) if URBN falls to or below $26 before expiration.
As of this writing, Joseph Hargett does not own any shares mentioned here.
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