AnnTaylor Stores started the year with a sharp pullback, and one
investor is looking for the retail stock to trade sideways.
optionMONSTER's tracking systems detected the sale of 40,000 March
24 calls for $1.30 against open interest of just 1,127 contracts. A
block of 2.12 million shares was purchased at about the same time,
suggesting the use of a delta-neutral trade that does not hinge on
a move in either direction.
The strategy lets the investor isolate the premium in the options
from the share price. They sell the calls to earn income and then
buy a delta-equivalent amount of stock. Given that the delta was
0.54, that corresponds to 2.16 million shares. (See our Education
ANN closed at $24.01 on Friday, up 0.17 percent in the session. The
trader is betting that it will remain around this level for the
next four weeks. If correct, the calls will dwindle to about zero
and the trader will pocket the premium received.
If the stock rallies, the losses on the calls will be offset by
gains resulting from the investor's long position in the stock. If
it drops too sharply, the trader also stands to lose money on the
shares, so their ideal outcome is for ANN to move as little as
possible through expiration.
The next big event that could potentially provide a catalyst is the
release of fiscal fourth-quarter results before the market opens on
ANN's price action may also cause some traders to expect a sideways
movement because it gapped higher following its last financial
release on Nov. 19, but it crumbled through that level in January.
The shares have bounced since then, but its 50-day moving average
is now falling (black line on chart), and some traders may believe
that a period of consolidation will now take place.
The delta-neutral trade pushed total option volume in ANN to 8
times greater than average, and accounted for almost all the
activity in the name on Friday.
(Chart courtesy of tradeMONSTER)