Retail stock highlights contrarian mindset

  • URBN call volume was unusually high on Thursday
  • Stock trading near six-month lows after sharp five-day sell-off
  • Volatility levels also dropped to multi-month lows

A well-worn quote from some master trader of yore goes something like this: “I can teach you the secret to making money in the market in five seconds—buy low and sell high. Now, give me five years and I’ll teach you how to do that.”

Although most people probably don’t think of it in such terms, buying low and selling high is often a “contrarian” approach, since prices can be low only if they’ve fallen, and can be high only if they’ve rallied. And if you buy when prices are falling or sell when they’re rallying, you’re a contrarian—at least for the moment.

That may have been on some traders’ minds yesterday, when retailer Urban Outfitters (URBN) was experiencing unusually high call volume:

Chart 1: LiveAction scan: Highest call-put ratios, 9/2/21. Unusual options activity. Heavy emphasis on URBN calls.

Source: Power E*TRADE (For illustrative purposes. Not a recommendation.)

In addition to a call-put ratio of nearly 32:1, URBN’s call volume was more than seven times average around noon ET. As it turned out, more than 80% of that volume—4,600 of the 5,616 contracts that had exchanged hands—were in the $33.50 (almost exactly at-the-money) calls and the $35 calls expiring one week from today.

If any call buyers were, in fact, expecting a near-term rebound, URBN’s price chart shows why they were arguably in a contrarian mindset. The stock was trading just a little above the nearly six-month low it hit on Tuesday after a five-day, 19% sell-off in the wake of its August 24 earnings release:

Chart 2: Urban Outfitters (URBN), 2/23/21–9/2/21. Urban Outfitters (URBN) price chart. Stock price, volatility at relative lows.

Source: Power E*TRADE (For illustrative purposes. Not a recommendation.)

What may surprise some traders was that the company topped its headline earnings and revenue numbers,1 and the Street didn’t appear to turn on the stock—the average analyst target remains around 31% above yesterday’s levels, at $43.70.2

Nonetheless, the fact that shares had slipped below the low of a five-and-a-half-month consolidation means traders who bought calls to trade a potential up move were short-term contrarians. After all, some momentum traders would likely look at this chart and see a stock in the process of confirming a downside breakout. On the other hand, URBN is still up nearly 160% since April 2020, so many longer-term traders and investors may simply see a stock that has pulled back within a longer-term uptrend.

Right or wrong, though, bullish call buyers may have had one factor on their side. The bottom of the chart shows URBN’s options implied volatility (IV) had recently fallen to its lowest level since the beginning of the consolidation, which means (all else being equal) options were more likely to be relatively underpriced than overpriced. In other words, options traders were potentially buying not just the stock, but also volatility, at a relative low point.

There’s nothing wrong with being a contrarian, as long you’re not just doing it for the sake of being contrary—i.e., trying to outsmart the market. More often than not, that ends with you outsmarting yourself. But in the right place, at the right time—and with proper risk management—it can be a conservative way to approach the markets.

Today’s numbers include (all times ET): Employment report (8:30 a.m.), PMI Services (9:45 a.m.), ISM Services Index (10 a.m.).


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1 Urban Outfitters (URBN) Tops Q2 EPS by 50c. 8/24/21.
2 Urban Outfitters Stock Forecast & Price Targets. 9/3/21.

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