Will the Uptrend in AnnTaylor Stores (ANN) Continue?

AnnTaylor Stores (ANN) On Tuesday, women’s apparel retailer, AnnTaylor Stores ANN said first-quarter revenue was expected to hit $475 million, above previous expectations of $445 million and better than the $455 million Wall Street was expecting. The shares moved sharply higher to a new annual high of $25 as a result, handily outperforming the declining broader market. This news, and the stock’s subsequent rally, prompted small investment-banking firm Jesup & Lamont to upgrade the shares to “buy” from “hold,” with a 12-month price target of $28. The retailer is expected to officially report earnings on or around May 21.

ANN shares have gained nearly 220% over the past 12 months and there are contrarian investors who believe that what goes up must eventually come back down – of course, timing when a stock will reverse is a challenge. There are also those who believe, like Jesup & Lamont, that the stock’s uptrend may continue. Options strategies can be employed by investors whether they are bullish, bearish, or neutral, and two hypothetical options trades are outlined below. Remember, these are merely examples, not buy-sell-hold recommendations, and be cognizant of your personal risk/reward parameters before executing any new trades.

*Prices given as of Tuesday afternoon

Bullish Option Strategy: Bull Call Spreads

Investors expecting continued upside in ANN shares might buy intermediate-term call spreads, such as the September 17.50/25 call spread (buying the 17.50 call, shorting the 25 call), currently priced for $5.00. If ANN merely stays above $25 through expiration on September 17, the spread buyer will book the maximum potential profit of $2.50 per spread. The maximum loss of the $5.00 premium paid, meanwhile, occurs if ANN drops to $17.50 or below at expiration. Breakeven for this spread is $22.50, so if ANN is trading anywhere above this at expiration, the spread will be profitable.

Profit/Loss of AnnTaylor (ANN) bull call spread

Bearish Option Strategy: Bear Put Spreads

Think the days are numbered for ANN’s rally? Consider a bear put spread in the December series. The December 25/15 put spread can currently be purchased for a net debit of $3.80 (by buying the closer-to-the-money 25 put and selling the further-from-the-money 15 put). If ANN is trading above $25 at December expiration, the spread buyer loses 100% of his initial investment. If it falls below 15, however, the maximum profit is capped at $6.20 (a return on risk of 163%). The spread will be profitable (at expiration) if ANN is anywhere below the breakeven price of $21.20.

Of course, with both this spread and the bull call spread above, the investor can close out of the trade at any time between now and expiration.

Your Take on ANN?

Is ANN’s trend going to be investors’ friend for a little while longer, or is the stock primed for a reversal? How might you trade ANN ahead of its earnings report?

Compare OptionsHouse rates for stock options with other brokers. New to options? See how your trade ideas would fare in a virtual trading account before committing any real money.

Photo Credit: ttarasiuk

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