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Chico's Earnings Inspire Option Bulls

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Today's bounce has lifted the shares back atop their 100-week moving average.

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In the wake of its well-received earnings report this morning, Chico's FAS, Inc. (NYSE:CHS) is seeing speculators flock to its options pits. Total option volume is running at quadruple the typical pace, with call volume in the lead. More than 1,500 contracts have currently changed hands, versus the 220 typically seen by this point in the trading day.

Garnering notable interest is the November 19 call, where 631 contracts have changed hands, trumping existing open interest of 417. All of the options have gone off at the ask price, pointing to buy-to-open activity.

Factoring in the volume-weighted average price (VWAP) of $0.20, breakeven for this position at expiration is $19.20 (strike price plus VWAP). Even after the stock's 6.4% jump to $16.31 today, this breakeven level is another 17.7% higher. Still, the option's delta has advanced to 14% from 9.4% at last night's close, giving the position a roughly 1-in-7 shot at expiring in the money.

Meanwhile -- with the uncertainty of earnings in the rearview mirror -- implied volatility (IV) has imploded, lowering CHS option premiums across the board. Specifically, the equity's 30-day, in-the-money IV is off 11.1 percentage points, or 27.2%, to 29.8%.

The women's apparel retailer earned 27 cents per share in the second quarter, falling a nickel short of analysts' estimates. Investors were cheered, however, by news that sales in the current quarter are up 4.9%. As one analyst with Oppenheimer & Co. observed, "it sounds like August results have bounced back and they are coming positively." Today's bounce, in fact, has lifted the shares back atop their 100-week moving average. Chico's closed south of this trendline last week for the first time since early February 2012.

This article by Beth Gaston was originally published on Schaeffer's Investment Research.

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Twitter: @schaeffers
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