Abercrombie & Fitch (ANF – Get Report) shares jumped 25% Friday after the retailer released earnings that topped analysts’ estimates. This creates an opportunity for savvy stock options traders, because such an exaggerated reaction to earnings news is likely to be reversed in subsequent sessions.
The company reported revenue of $879 million, vs. estimates of $863 million. Earnings were 48 cents, smashing analysts’ estimates for 22 cents.
The chart below shows what happened to the stock.
The stock’s price gapped above resistance to close at a new high of $24.37, the highest price in the past six months. This was accompanied by a volume spike that exceeded any other single session’s volume over the past six months by a wide margin. Unusual volume spikes often are found as a forecasting sign of a coming reversal. Lastly, momentum as measured by the relative strength index moved sharply higher and approached overbought territory.
All of these signals predict a coming reversal and return of the stock’s price back below resistance of $23.25. This makes a bearish options trade attractive right now. Look at the December 24 put option. It closed on Friday with an ask price of 1.13, so with trading costs it can be bought for approximately $122. It will not take very much of an adjustment to turn this put into a profitable trade.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.
Besides blogging at TheStreet.com, Michael Thomsett also blogs at the CBOE Options Hub and several other sites. He is author of 11 options books and has been trading options for 35 years. Thomsett Publishing Website