ANF Analysis

Abercrombie & Fitch Co. (ANF)

ANF publishes earnings on Thursday before the opening bell.

I shall use the series of monthly options that trade for the last time nine days hence, on June 2.

Implied volatility stands at 71%, which is 6.9 times the VIX, a measure of the volatility of the S&P 500 index.

ANF’s IV stands in the 91st percentile of its annual range and the 97th percentile of its most recent broad movement.

The price used for analysis was $13.01.

Premium: $0.57 Expire OTM  
ANF-iron fly Strike Odds Delta
Long 20.00 83.5% 38
Break-even 13.57
Short 13.00 52.4% 54
Short 13.00 45.8% 46
Break-even 11.57
Long 11.00 71.9% 20

The premium is 13% of the width of the position’s wings.

The risk/reward ratio is 11.3:1.

Decision for My Account

That 11.3:1 risk/reward ratio is no typo. What an awful grid! Needless to say, I’m not touching this prospective trade with a 10-foot pole. 

Using the iron fly structure, just in-the-money and just out-of-the-money prices are a distance from the at-the-money point. That creates a skew that, as a percentage of the strike price, is greater than I like.

I’m hindered on the long strikes by two facts: On the calls, the maximum strike available to me is delta 38; I normally aim for a delta of 10 or less. On the puts, the bid rise hit’s zero below 20.

All of those combined create an unacceptably low premium in relation to the width of the wings, and that creates the outsized risk.

No trade.

By Tim Bovee, Portland, Oregon, May 24, 2017

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