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Urban Outfitters Traders See Modest Upside Ahead

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URBN's June 41 calls were popular yesterday, but face potential overhead resistance.

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Urban Outfitters (NASDAQ:URBN) calls were popular yesterday, with over 6,800 contracts traded -- almost 2.5 times the usual daily volume, and more than five times the number of puts exchanged. Leading the way was the June 41 call. Over 4,000 of these in-the-money contracts were exchanged, with 94% at the ask price, suggesting they were bought. Since open interest spiked overnight, it's safe to assume new positions were created.

Digging a little deeper, more than half of the calls can be traced to a single block trade placed just before noon at the Chicago Board Options Exchange (CBOE). More specifically, one trader picked up 2,332 call options for the ask price of $1.35 each. In order for him to secure a profit, URBN shares must climb past $42.35 (strike price plus net debit) prior to June 21, when front-month options expire. That's a modest 1.1% pickup from Thursday's close at $41.87.

Buying URBN calls has become a trend at the International Securities Exchange (ISE), CBOE, and NASDAQ OMX PHLX (PHLX). The stock's 10-day call/put volume ratio is 7.10, which means calls bought to open have outstripped puts by a count of approximately 7-to-1 during the past two weeks. More tellingly, that ratio ranks in the 94th percentile of its annual range, demonstrating the higher-than-usual preference for bullish bets.

In the same vein, Schaeffer's put/call open interest ratio (SOIR) for Urban Outfitters is 0.42, which signifies the fact that call open interest is more than twice that of put open interest, for options expiring in the next three months. Relative to the past year's worth of SOIR readings, short-term open interest on calls has been higher only 4% of the time.

Technically, however, Urban Outfitters has been a laggard. The shares have added an underwhelming 6.4% year-to-date, and have trailed the broader S&P 500 Index (INDEXSP:.INX) by more than 4 percentage points over the past three months. The retailer is also facing potential resistance at $42, which rebutted previous rally attempts between February and April. The stock finally overcame the barrier for two weeks in May before dropping below it, again.

Still, no matter what happens, the most yesterday's call buyers can lose is the premium they paid to initiate their long call positions.

This article by Alex Eppstein was originally published on Schaeffer's Investment Research.

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Twitter: @schaeffers
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