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Three Ways to Trade Abercrombie Options


As a bearish trader who's expecting movement in Abercrombie, here's how I'd play it.

MINYANVILLE ORIGINAL Abercrombie & Fitch (ANF) is scheduled to reports its Q2 earnings before the market opens tomorrow, August 15, 2012. After a downbeat quarter for the apparel company, EPS is expected to come in at $0.17 on revenue of $995.67 million. EPS for this quarter is down from $0.35 a year ago, a loss of -67%. On the other hand, revenue is up from $916.75 million a year ago, an 8.6% increase.

In the last four quarters, Abercrombie has beaten earnings estimates twice, matched once, and missed estimates last October.

Date Estimates Earnings
April 12 $0.02 $0.03
Jan 12 $1.12 $1.12
Oct 11 $0.71 $0.57
July 11 $0.30 $0.35

On August 1, Abercrombie announced that it expected Q2 EPS to fall between $0.15 and $0.18, with the majority of its year-over-year losses stemming from a drop in growth in same store sales. Moreover, Abercrombie projected that same store sales would fall an additional 10% in the second half of 2012, further pushing down Abercrombie's revenue. Covering their yearly profits, Abercrombie announced the EPS for fiscal 2012 was expected to fall between $2.50 and $2.75. However, this number is a significant loss from its projections in February, where it projected EPS between $3.50 and $3.75.

In the first quarter of 2012, profit fell -88.1% to $3 million, from $25.1 million, but still exceeded analysts' expectations. Additionally, revenue rose 10.1% to $921.2 million from $836.7 million. Finally, with the retail industry significantly dependent on major shopping seasons, Abercrombie will need a significant push in back-to-school and holiday sales to break above its current EPS projections.

Currently, Abercrombie has a market capitalization of $2.68 billion and is trading at $32.54 with a 52-week range of $28.64 - $76.53. Year-to-date, Abercrombie has fallen nearly -33% with a -29% loss in the last quarter.

20 Day SMA : $33.49 50 Day: $32.87 200 Day: $44.09

Date PreEarn PostEarn Change
05/16/12 $45.40 $39.50 $-5.90 (-13.0%)
02/15/12 $44.59 $48.30 $+3.71 (8.3%)
11/16/11 $55.70 $48.10 $-7.60 (-13.6%)
08/17/11 $71.02 $64.87 $-6.15 (-8.7%)
Average Magnitude of Post Earnings Return 10.9%

Near-Term Straddle Indication:
Term Strike NBBO Size %Spot(Mid)
08/18 $32 $3.09 - $3.17 22 x 14 9.6%
08/18 $33 $3.12 - $3.21 23 x 22 9.7%

As a bearish trader who's expecting movement in Abercrombie, I am looking at three different ways to trade Abercrombie options:

Trade: Selling the August 33-34 call spread for $.40
Risk: $60 per 1 lot
Reward: $40 per 1 lot
Notes: Make money if the stock is flat, down, or up less than 1%.

Trade: Buying the August 32 puts for $1.27
Risk: $127 per 1 lot
Reward: $3073 per 1 lot
Notes: I do not like buying too much premium into earnings, so I am passing on this trade.

Trade: Buying the Aug 33 straddle for $3.15
Risk: $315 per 1 lot
Reward: Unlimited
Notes: This trade I like this most, because I will make money as long as the stock moves at least 9.6%.
No positions in stocks mentioned.
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