Tuesday, February 8, 2011

Trade of the Day: ANF 2,000 Aug $65 calls sold and 2,000 Aug $50/40 put spreads bought

The Trade
A trader sold 2,000 August $65 calls at $1.65, sold 2,000 August $40 puts at $1.65, and bought 2,000 August $50 puts at $5 for a debit of -1.7 or $340,000.

As you can see from the risk/reward graph above, the spread is bearish. The maximum risk is unlimited because we are naked short 2,000 calls at $65. Its important to note that this trader could also be long the stock and initiated this spread as a hedge. The maximum gain would occur at an underlying stock price of $40 and below. The max profit potential is $1,660,000. At this level, the short call and short put would expire worthless and our long put would be exercised.

The line shown in the chart above is the lower break even price of $48.30. As you can see, the lower break even price was a strong support level at the end of January. The 52-week range is a low of $29.94 and a high of $46.22. Abercrombie & Fitch Co. will report earnings before the open on February 16, 2011.

According to Google Finance, ANF had the highest P/E ratio compared to its competitors GPS, URBN, AEO, ARO, and BKE.

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