Abercrombie bulls squeeze profits

Abercrombie & Fitch counfounded short sellers today, surpassing same-store sales estimates amid takeover speculation.

Last Thursday, Investitute’s proprietary programs showed that 3,000 Weekly $13 calls expiring tomorrow were purchased for $0.70 and $0.71 with shares at $12.59. These were clearly new positions, as open interest in the strike was only 227 contracts before the activity appeared.

Those calls traded for up to $1.55 this morning, more than doubling in value just one week later. The stock was up 11.1 percent in the same time, illustrating how options can far outperform their underlying shares.

Long calls lock in the price where investors can buy a stock, letting them position for a rally at limited cost with the potential for significant leverage. They carry less risk than owning shares because the most that can be lost is the price of the options no matter how far the stock might fall.

ANF jumped 9 percent to finish at $14.05 today, gapping higher this morning after its pre-market quarterly report. Short interest is estimated at more than 35.5 percent of the float.

The Wall Street Journal reported today that one of the fashion retailer’s rivals, American Eagle Outfitters, is working with private-equity firm Cerberus Capital on a possible buyout offer for the company.