While recommending a teen retailer just after the holidays may sound like a case of the Christmas crazies, there may be upside potential for Abercrombie & Fitch (ANF) in the fickle world of fashion.
We all know that the broad market posted substantial gains in 2013, yet ANF is off 28% in the past 52 weeks. From a technical perspective, it may be time to jump in. ANF has largely traded in a range between $54 and $34 with solid support just below at $30. Bullish divergence, i.e., new lows in price without new highs in volatility, may be a sign that a bottom is forming.
The first recovery objective is the $44 midpoint of the two-year trading range. A break above $54 projects a $20 move and a secondary target of $74. The $44 target is about 32% higher than recent prices, but traders who use a capital-preserving, stock substitution strategy could see a 146% return on a move to that level.
Recommended Trade Setup
Buy ANF May 28 Calls at $6.50 or less
Set stop-loss at $3.25Set initial price target at $16 for a potential 146% gain in five months
A close below $30 in ANF on a weekly basis or the loss of half of the option’s premium would trigger an exit. If you do not use a stop, the maximum loss is still limited to the $650 or less paid per option contract. The upside, on the other hand, is unlimited. And the May options give the bull trend almost five months to develop.
This trade breaks even at $34.50 ($28 strike plus $6.50 options premium). That is about $1 away from ANF’s recent price. If shares hit the $44 target, then the call option would have $16 of intrinsic value and deliver a gain of 146%.
