Just when investors thought that Urban Outfitters, Inc. (URBN) was in the midst of turning itself around, the company stumbled hard. Plagued by flagging same-store sales and a PR disaster surrounding a very inappropriate Kent State University sweatshirt, URBN stock has plunged more than 20% since peaking near $40 in early September. The company is slated to release its third-quarter earnings figures Monday, Nov. 17, but will the report bring more of the same, or signal a recovery for URBN shares?
Following a string of downward revisions, the consensus is currently expecting a profit of 41 cents per share from Urban Outfitters. And despite the company’s missteps, many within the brokerage community are quite bullish on the stock. Specifically, Thomson/First Call reports that URBN stock has attracted 21 “buy” ratings, 12 “holds” and no “sell” ratings.
This optimism is also prevalent within the options pits as well. Currently, the November/December put/call open interest ratio for URBN stock arrives at 0.66, with call open interest nearly doubling put open interest in the front two months. This ratio dips even further into bullish territory when we zero in on the front-month November series, arriving at 0.48.
Most of URBN’s recent options activity has been quite bullish leading up to the company’s quarterly report. Yesterday, options volume was more than four times the norm for URBN, with one trader taking out a rather bullish position on the stock. According to OptionMonster, a trade consisting of 1,600 purchased Nov $31 calls and 1,500 sold Dec $28 puts crossed the tape on Wednesday, resulting in a bull calendar spread.
Taking a closer look at options data for URBN stock, we find that peak call open interest totals 10,260 contracts at the out-of-the-money Dec $33 strike. Peak put open interest also resides at the Dec $33 strike, with 5,894 contracts in residence.
Click to Enlarge Overall, November options implieds for URBN stock are pricing in a potential post-earnings move of about 5.6%. This places the upper bound at $33.79, while the lower bound lies at $30.21.
A downside move would meet with technical support near $30 — the area that held URBN’s most recent plunge — while a post-earnings rally could come close to filling in last month’s gap lower.
2 Options Trades on URBN Stock
Buy Call Spreads: With URBN stock in the process of rebounding from oversold levels, and the company’s same-store sales and revenue woes already factored into the shares, it seems likely that any positive news coming out of next week’s quarterly report should have a buoying effect. As such, traders looking to follow the bullish crowd might want to consider a Dec $32/$34 bull call spread. At the close of trading on Wednesday, this spread was offered at 31 cents, or $31 per pair of contracts. Breakeven lies at $32.31, while a maximum profit of $1.69, or $169 per pair of contracts, is possible if URBN stock closes at or above $34 when December options expire.
Sell Puts: For those traders not willing to jump onto the bullish bandwagon with both feet, there are alternate strategies. Specifically, a Nov $27 put sell stands a good chance of finishing out of the money when these options expire at the end of next week. After the close last night, the Nov $27 put was bid at 27 cents, or $27 per contract. In this trade, you keep the premium received for selling the Nov $27 put as long as URBN stock remains above $27 through expiration. However, if URBN stock trades below $27 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $27 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
