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ANF Options Reaction to new Corporate Structure

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The Deal reported that on Tuesday, Abercrombie & Fitch (ANF) took some steps to placate activist investors. The company took chairman duties away from its CEO and eliminated an old "poison pill" provision set to expire in 2018 that would have triggered the issuance of new shares and diluted the position of any activist with sufficiently large holdings.

The company has been struggling recently as teenagers are less interested in paying a premium for the brand's t-shirts. The stock has been trading between $32 and $38 since August 2013. While the lower share price and these conciliatory measures make the company a more attractive target, the company has not yet put forward a turnaround strategy.

So far, the options market has not reacted significantly to the news, with only 4,000 contracts traded by late Wednesday morning. Moreover patterns of overall option pricing in recent weeks suggest that investors are not willing to pay a premium for ANF as a turnaround candidate or as a takeover target. Since 2012, the mean realized one year volatility of the stock has been about 55%. Option implied volatility at a one year expiration has been priced that high on a few occasions, but has averaged closer to 40% since the beginning of 2013. At a closer horizon, we see the same thing: quarterly premiums are priced near 40% in implied volatility terms, versus 46% realized volatility in the shares over the last three months.

If anything, options seem to be priced at a relative discount, which is not a positive sign for shareholders. If market expectations were for a turnaround in the company or that an activist would come in with a respectable bid, we would expect to see options trade at a premium to recent historical volatility. Instead, markets are pricing ANF contracts for more of the same.

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At the time of publication, Jared Woodard held no positions in the stocks or issues mentioned.


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