Anatomy of a Trade – $ANF Gets Snookied

by CC March 4, 2015 1:29 pm • Education

Yesterday, we looked at Abercrombie & Fitch (ANF) and its impending earnings report. This story is fascinating to watch from a brand perspective as there was a lot of talk back near the stock’s highs in 2011 that ANF could have a Jersey Shore problem. The problem was that the characters on the trashy MTV show wore a ton of ANF clothing and the company got a little worried about that association, even going so far as to (tongue in cheek?) offer the cast money not to wear their brand on tv. It’s always funny reading these kinds of stories in the Grey Lady’s tone.

From the NYT:

the company said on Tuesday that it had become concerned after noticing that a cast member, Mike Sorrentino, known as “the Situation,” had taken to wearing its clothes. Mr. Sorrentino’s nickname is a reference to his six-pack abs.

I don’t know what exact effect all of this had on the company but I do remember talking to friends in the entertainment industry at the time who said it was common knowledge (possibly apocryphal) that brands slipped the producers of trashy reality TV their competitor’s products to be used by cast members on the shows. Funny if true.

A quick aside, writing about this reminded me of a funny Onion article from years back:

Screen Shot 2015-03-04 at 11.09.22 AM

Tag Body spray was quietly discontinued by Procter & Gamble in 2010. Having your brand be the butt of jokes can be tough.

Jersey Shore ran from December 3, 2009 to December 20, 2012 in the U.S.. Here’s ANF’s 5 year chart, peaking in mid to late 2011 and basically being under pressure ever since:

ANF 5yr chart from Bloomberg
ANF 5yr chart from Bloomberg

So back to the trades. We detailed 2 directional structures that looked to either take advantage of high vol or in the case of the bearish one, looked to alleviate that high vol and isolate the move to the downside. I want to revisit the bearish structure for educational purposes, detail why we chose a fly for that view and what would be done now as far as trade management. To recap, here was the structure and rationale:

If sentiment is correct and this stock stays in the penalty box, for a bearish view, the March regular 25/21/17 put fly may be the way to play at around 1.10. This isn’t exactly short premium but it lays off a lot of the high volatility risk by having a breakeven quite near where the stock is currently trading (breakeven on this trade is 23.90 with the stock currently at 24.10). This structure is best viewed as a defined risk short isolating the expected move to the downside.

ANF is currently trading $21, which was almost exactly the implied move and is exactly at the guts of the fly. Mark to market this fly is now worth a little more than 2.50.

The reason we highlighted the fly was that it was the best way to target a move to the downside without risking a ton of premium in the form of a put or put spread with implied volatility so high. As we mentioned above the fly had a breakeven at 23.90 with the stock at 24.10. So it was right on the edge of being an in-the-money fly. And today it actually is.

As far as management, the balance of the trade’s intrinsic value is probably not worth sticking around for. There’s no real reason for the stock to hang out around $21 for the next few weeks (although it could) and with the fly’s value now worth way more than what it could still earn on a $21 pin it would just make sense to close it here take the money and go to the gym, tanning salon and then laundry.