Here’s a reality check. Chances are, if you were looking for securities triggering unusual options volume, apparel brand Abercrombie & Fitch (ANF) was not your first choice — not even close. And why would it be? With so much attention heaped on Hindenburg Research’s short-seller report on Carvana (CVNA) or the gravity-defying hijinks of quantum computing enterprises, ANF stock is incredibly boring by comparison.
Still, it’s sometimes the boring ideas that are worth a deeper dive. That’s not to take away from the hot securities of the moment. As I mentioned recently, Carvana may make for an excellent options trade on rising implied volatility. Regarding quantum computers, there is plenty of substance for hardened speculators to take directional wagers.
However, seemingly everyone is talking about CVNA or advanced computers. Not many analysts are actively pounding the table on ANF stock, even though it currently carries a Moderate Buy consensus view among experts. It’s just not a particularly exciting opportunity, at least from the outside.
For example, ANF stock did make Barchart’s list of unusual options volume but not in the most desirable sense. Following Friday’s close, total volume reached 5,662 contracts against an open interest reading of 105,198 contracts. This level represented a 34.66% decline from the trailing one-month average metric.
Interestingly, the put/call volume ratio was almost split evenly at 1.02. Breaking it down, there were 2,806 calls while the put column hit 2,856. On paper, that might seem sketchy for ANF stock. Nevertheless, options flow — which focuses exclusively on big block transactions likely placed by institutional investors — was decidedly bullish, with net trade sentiment rising to $196,600.
For gross totals, bearish options volume landed at $-58,000 while bullish options volume reached $254,600 — quite a discrepancy. In the open market, ANF stock gained almost 4%. Over the past 52 weeks, it returned nearly 72%.
Yet even with this performance, people just aren’t talking about Abercrombie as much relative to other publicly traded businesses. That could change soon enough.
ANF Stock Appears to be Forming a Bullish Pennant Formation
To be quite honest, I wasn’t even planning on writing about ANF stock. As stated earlier, there are several other intriguing entities that are screaming for the spotlight. However, I was alerted to the prospect of ANF printing a bullish pennant formation. Upon closer inspection, the stars seem aligned for exactly this thesis.
According to the discipline of technical analysis, pennants usually represent continuation patterns. Author and expert John J. Murphy once wrote that pennants (along with flags) are among the most reliable of this pattern category. In a bullish pennant, a security initially rallies, then enters a sideways consolidation where the upper and lower price trendlines converge to an apex. At the focal point, the target security may break out.
What makes ANF stock so intriguing is that it appears to be forming a long-term pennant. From the summer of 2023, ANF steadily marched higher until it peaked near mid-June of last year. This is where the pennant formation is quite conspicuous. If the hypothesis turns out to be accurate, Abercrombie could be due for a big swing higher.
Lending additional support to the idea of a breakout is the stock’s IV percentile. Since late November to early December, this metric has generally been moving higher. It would seem, then, that the market anticipates strong kinesis.
In perhaps other circumstances, a long iron condor (or a wager on volatility) would be an appropriate trade. However, condors can be expensive to buy because you’re paying a premium to cover the long side and short side of the trade. However, the bullish pennant formation features a directional bias. Therefore, it may be monetarily more prudent to consider a directional wager rather than a bet on rising volatility.
Identifying a Specific Options Strategy
Given the potential likelihood of an upward movement due to the bullish pennant formation, an appropriate strategy could be the bull call spread. This transaction involves buying a call option and simultaneously selling a call at a higher strike price for the same expiration date. The idea is to use the credit received from the short call sale to partially offset the debit paid for the long call.
However, heavily traded optionable securities may have multiple mathematically viable call spreads to choose from. Here, we can narrow down our list with Barchart’s Expected Move calculator, which reflects 85% of the value of the at-the-money straddle for forward-looking options chains. Notably, for the expiration date of Jan. 24, 2025, the upper and lower price targets are $175.67 and 142.18, respectively.
Since we’re assuming upward movement due to the bullish pennant, we’re looking at the upper target. Here, to give myself a little more cushion, I might consider dropping the target down a few bucks to $170. This price point aligns with a prior resistance level so it makes for a natural milestone that the optimists will aim for.
Having identified the short strike price (second leg of the call spread), we’ll look at ideas for the long strike (first leg). Personally, since I believe in the pennant formation, I would consider the $165 strike since it lowers the positional risk to $190 or the maximum we can lose in the trade. On the plus side, the maximum profit stands at $310 or a payout of 163.16%.
Of course, the other spreads with lower long strikes reduce the breakeven threshold, making them more likely to be successful. Still, if we’re confident in the technical signal, the 165/170 bull call spread is awfully tempting.
