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Apparel retailer Abercrombie & Fitch Co. (ANF - 38.02) hasn't fared too well in the long term, technically speaking, as the equity has been trading beneath its 20-week and 32-week moving averages since November 2011. But the security has added nearly 31% since early August, and has outperformed the broader S&P 500 Index (SPX) by more than 14 percentage points during the past three months. This could explain why one speculator is using options to simulate owning ANF shares.
During Monday's session, blocks of 2,500 contracts crossed at the January 2013 40 strike on the call side, and at the January 2013 35 strike on the put side. The calls were bought for the ask price of $3.10, while the puts were sold at the bid price of $2.59. According to Trade-Alert, the options were marked as being opened, which means a synthetic long stock position was constructed for a net debit of $0.51 per pair of options.
The primary advantage of this strategy can be seen in the initial cost, as the options trader can control 100 shares for just $0.51 per pair of contracts, as opposed to the roughly $3,800 it would cost to purchase an equal number of shares today.
By employing a synthetic long position, the trader's profit will increase with each step that ANF takes above the breakeven mark of $40.51 (call strike plus net debit) over the next several months -- similar to an ANF shareholder. And like a long stock position, the speculator will suffer additional losses the further ANF drops, and declines are unlimited down to zero. Meanwhile, the entire premium paid will be forfeited, should ANF finish between $35 and $40 when the LEAPS expire.
From a wider sentiment standpoint, though, the optimistic strategy runs counter to the growing trend seen in the options pits. Speculators on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 3.10 puts for every call, signaling that traders on these exchanges have shown a hearty appetite for bearish bets over bullish during the past 10 days.
Elsewhere on Wall Street, short interest ballooned 29.5% over the past two reporting periods, and now represents a healthy 12.6% ANF's available float. At the equity's average pace of trading, it would take nearly one week to buy back all of these shorted shares.
Should ANF continue to show signs of life on the charts, the bearish sentiment already stacked against the stock could translate into a contrarian tailwind.