AnnTaylor draws neutral strategy

By David Russell,

Shutterstock photo

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 section)

ANN 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 March 11.

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)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.

This article appears in: Investing Options
Referenced Stocks: ANN

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