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Bearish Options Play Paying Off As Abercrombie Shares Lose Their Cool

Options brief will resume June 3rd, 2013.

Today’s tickers: ANF, XLU & XLV

ANF - Abercrombie & Fitch Co. – Shares in teen retailer, Abercrombie & Fitch Co., are getting hammered today, down 10% at $48.92 in early-afternoon trading after the company reported a wider-than-expected first-quarter loss and missed topline estimates, lowered its full year earnings forecast and said same-store sales would be down slightly for the rest of the year. A review of pre-earnings report activity in Abercrombie options yesterday indicates one trader was prepared for the pullback today. It looks like the strategist initiated a ratio put spread, picking up 500 May 31 ’13 $50 strike puts for a premium of $0.91 each, and selling 1,000 puts at the May 31 ’13 $47 strike at a premium of $0.35 apiece. The bearish trade cost a net premium of $0.21 per contract and established an effective breakeven price of $49.79, with maximum possible gains of $2.79 per contract given a 13.5% move lower (based on ANF’s closing price of $54.37 on Thursday 5/23/13) in the stock to $47.00 by expiration on the 31st of May. The $47/$50 ratio put spread is working today given the sharp selloff in the price of the underlying, and would cost roughly $1.20 per contract, or more than five times as much, to initiate as of the time of this writing.

XLU - Utilities Select Sector SPDR – At the end of April shares in the Utilities ETF were trading at the highest level since the summer of 2008, having rallied nearly 20% during the first four months of 2013 to hit $41.44 on April 30th. Several trading sessions prior to securing the $41.44 high, we noted a large trade in XLU options; the purchase of a block of 50,000 Jun $40 strike puts for a premium of $0.51 per contract. The trade was initiated within 30 minutes of the opening bell on April 25th when shares in the XLU were trading around $40.87. The slide in shares of the XLU during the month of May, including a 1.0% dip in the price of the underlying to $38.87 as of the time of this writing, finds premium required to buy the Jun $40 strike puts today up at $1.56 each as of midday in New York, or triple the price paid this time last month.

XLV - Health Care Select Sector SPDR – Fresh interest in XLV puts today suggests at least one trader is positioning for the price of the underlying to extend losses during the next couple of months. Shares in the Health Care Select Sector SPDR Fund, up roughly 35% since this time last year, slipped 0.40% today to $49.08 at 12:25 p.m. ET amid a down day for U.S. stocks. The most actively traded options on the XLV in the early going this morning were the Jul $48 strike puts, with around 6,000 contracts changing hands versus open interest of just 103 contracts. The bulk of the volume appears to have been purchased by one strategist for a premium of $0.81 per contract. The bearish position makes money at July expiration should shares in the Health Care ETF slip 3.85% from the current level to trade below the breakeven price of $47.19. Shares in the XLV last traded below $47.19 on May 2nd.

 

Caitlin Duffy
Equity Options Analyst


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