Bearish Options Play Paying Off As Abercrombie & Fitch Co. (ANF) Shares Lose Their Cool

Abercrombie & Fitch Co. (NYSE:ANF) – Shares in teen retailer, Abercrombie & Fitch Co. (NYSE:ANF), 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 & Fitch Co. (NYSE:ANF) 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 Abercrombie & Fitch Co. (NYSE: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.