May 2, 2006                                    Sell ANF Put Spreads, Buy GPS Puts                                    •    ...
Equity Derivatives Strategy | Sell ANF Put Spreads, Buy GPS Puts                               Softline Same Store Sales S...
Equity Derivatives Strategy | Sell ANF Put Spreads, Buy GPS PutsThe respective research analysts responsible for the funda...
Equity Derivatives Strategy | Sell ANF Put Spreads, Buy GPS PutsOur coverage analysts use a relative rating system in whic...
Equity Derivatives Strategy | Sell ANF Put Spreads, Buy GPS PutsLehman Brothers policy for managing conflicts of interest ...
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Stock Options on ANF and GPS - The Market's Expectation for Same-Store Sales

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Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA

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Transcript of "Stock Options on ANF and GPS - The Market's Expectation for Same-Store Sales"

  1. 1. May 2, 2006 Sell ANF Put Spreads, Buy GPS Puts • We recommend selling ANF May ’06 55/60 put spreads as a means of expressing Lehman Ryan Renicker, CFA softline analyst Jeff Black’s positive outlook for ANF ahead of the company’s SSS release. 1.212.526.9425ryan.renicker@lehman.com • The net premium received from this position is approximately $1.15 and the trade is profitable if Devapriya Mallick ANF trades above $58.85 as of the May 19 expiration date. 1.212.526.5429 dmallik@lehman.com • A portion of the proceeds received from the short ANF put spread can then be used to fully fund short-dated downside protection on GPS, on which Black has a bearish view versus consensus heading into its SSS report. • Specifically, we recommend purchasing GPS May ’06 puts struck at 17.50, at a cost of about $0.30. This leg of the trade would be profitable if GPS trades below $17.20 as of the May 19 expiration date. • If investors purchase these puts on GPS in conjunction with the short ANF put spread, they would maintain a bullish stance on ANF heading into SSS, a bearish stance on GPS heading into SSS and would receive about $0.85 for doing so ($1.15 ANF net credit - $0.30 GPS put purchase).Lehman Brothers does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict ofinterest that could affect the objectivity of this report.Customers of Lehman Brothers in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them,where such research is available. Customers can access this independent research at www.lehmanlive.com or can call 1-800-2LEHMAN to request a copy of this research.Investors should consider this report as only a single factor in making their investment decision.PLEASE SEE ANALYST(S) CERTIFICATION AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 3.
  2. 2. Equity Derivatives Strategy | Sell ANF Put Spreads, Buy GPS Puts Softline Same Store Sales Strategy We scan the retail softline universe ahead of this Thursday’s of same-store sales (SSS) releases to identify option trades we believe offer attractive risk/reward characteristics and complement Lehman fundamental views. Sell ANF Put Spreads for Bullish View We recommend selling ANF (Abercrombie & Fitch Co., $61.27) May ’06 55/60 put spreads as a means of expressing Lehman softline analyst Jeff Black’s positive outlook for ANF ahead of the company’s SSS release1 (Lehman comp estimate of 9.2% vs. 8.0% consensus2). The net premium received from this position is approximately $1.153 (short 60 strike put for $1.50 – long 55 strike put $0.35) and the trade is profitable if ANF trades above $58.85 as of the May 19 expiration date. Buy GPS Puts for Bearish View A portion of the proceeds received from the short ANF put spread can then be used to fully fund short- dated downside protection on GPS (The Gap, Inc., $18.02), on which Black has a bearish view versus consensus heading into its SSS report (Lehman comp estimate of -6.4% vs. -4.8% consensus, management has noted traffic down significantly in 1Q ’06). Specifically, we recommend purchasing GPS May ’06 puts struck at 17.50, at a cost of about $0.30. This leg of the trade would be profitable if GPS trades below $17.20 as of the May 19 expiration date. If investors purchase these puts on GPS in conjunction with the short ANF put spread, they would maintain a bullish stance on ANF heading into SSS, a bearish stance on GPS heading into SSS and would receive about $0.85 for doing so ($1.15 ANF net credit - $0.30 GPS put purchase).Figure 1: Expiration Payoff: Short ANF Put Spreads + Long GPS Put StrategySource: Lehman Brothers, Bloomberg. 1 Please see Retail Softlines, April Sales Preview (Jeff Black), May 1, 2006 for further fundamental details. 2 Source: Thomson Financial consensus estimate (5/2/06). 3 All prices quoted in this note are as of today’s close. Source: Bloomberg. May 2, 2006 2
  3. 3. Equity Derivatives Strategy | Sell ANF Put Spreads, Buy GPS PutsThe respective research analysts responsible for the fundamental ratings hereby certify (1) that the views expressed in this research email accurately reflect ourpersonal views about any or all of the subject securities or issuers referred to in this email and (2) no part of our compensation was, is or will be directly or indirectlyrelated to the specific recommendations or views expressed in this email.I, Ryan Renicker, hereby certify (1) that the views expressed in this research email accurately reflect my personal views about any or all of the subject securities orissuers referred to in this email and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressedin this email.To the extent that any of the conclusions are based on a quantitative model, Lehman Brothers hereby certifies (1) that the views expressed in this research emailaccurately reflect the firms quantitative research model (2) no part of the firms compensation was, is or will be directly or indirectly related to the specificrecommendations or views expressed in this research report.Important DisclosuresLehman Brothers does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have aconflict of interest that could affect the objectivity of this email communication.Customers of Lehman Brothers in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost tothem, where such research is available. Customers can access this independent research at www.lehmanlive.com or can call 1-800-2-LEHMAN to request a copy ofthis research.Investors should consider this communication as only a single factor in making their investment decision.The analysts responsible for preparing this report have received compensation based upon various factors including the Firm’s total revenues, a portion of which isgenerated by investment banking activities.Stock price and ratings history charts along with other important disclosures are available on our disclosure website at www.lehman.com/disclosuresAnd may also be obtained by sending a written request to: LEHMAN BROTHERS CONTROL ROOM , 745 SEVENTH AVENUE, 19TH FLOOR NEW YORK, NY10019Mentioned StocksAbercrombie & Fitch Co (ANF - USD60.92) 1-Overweight / Neutral JRisks Which May Impede the Achievement of the Price Target: We believe the long-term risks for Abercrombie and Fitch are (1) that comparable store sales remainsluggish for a protracted period of time, (2) the challenges associated with managing multiple store formats, (3) that Hollister, the Companys main growth vehicleexperiences a slowdown, (4) that the new concept, Ruehl, does not gain traction and does not succeed, (5) the fashion risk associated with being a highly seasonal,highly cyclical, and fashion oriented business, and (6) the removal of import quotas could have a significant impact on worldwide sourcing patterns during 2005.Our earnings forecast and investment thesis for Abercrombie and Fitch are subject to such factors as cost of goods, consumer spending and debt levels, currencyfluctuations, interest rate fluctuations, store expansion plans, legal proceedings, and variability in comparable store sales.Gap Inc (GPS - USD18.15) 2-Equal weight / Neutral J/K/MRisks Which May Impede the Achievement of the Price Target: We believe the long-term risks for The Gap are (1) the challenges associated with managingincreasingly vast and complex operations, (2) the ability to acquire and successfully integrate assets abroad, (3) the proficiency with which the company adapts itsstore formats to the various economic and cultural environments in international markets, (4) the fashion risk associated with being a highly seasonal, highly cyclical,and fashion oriented business, (5) the removal of import quotas could have a significant impact on worldwide sourcing patterns during the fourth quarter of Fiscal2004 as well as in 2005, and (6) changes in currency and exchange rates in foreign currency and buying operations. Our earnings forecast and investment thesisfor GPS are subject to such factors as cost of goods, consumer spending and debt levels, interest rate fluctuations, store expansion plans, legal proceedings, andvariability in comparable store sales.Disclosure Legend:J: Lehman Brothers Inc. or an affiliate trade(s) regularly in the shares of the subject company.K: Lehman Brothers Inc. has received non-investment banking related compensation from the subject company within the last 12 months.M: The subject company is or during the last 12 months has been a non-investment banking client (securities related services) of Lehman Brothers Inc.Options are not suitable for all investors and the risks of option trading should be weighed against the potential rewards.Supporting documents that form the basis of the recommendations are available on request. Please note that the trade ideas withinthis report in no way relate to the fundamental ratings applied to European stocks by Lehman Brothers Equity Research.Guide to Lehman Brothers Equity Research Rating System May 2, 2006 3
  4. 4. Equity Derivatives Strategy | Sell ANF Put Spreads, Buy GPS PutsOur coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2- Equal weight or 3-Underweight (see definitions below) relative to othercompanies covered by the analyst or a team of analysts that are deemed to be in the same industry sector (“the sector coverage universe”). To see a list of companies thatcomprise a particular sector coverage universe, please go to www.lehman.com/disclosures.In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 3-Negative (see definitions below).A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors should carefully read the entire research report including thedefinitions of all ratings and not infer its contents from ratings alone.Stock Rating1-Overweight - The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.2-Equal weight - The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.3-Underweight - The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.RS-Rating Suspended - The rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstancesincluding when Lehman Brothers is acting in an advisory capacity on a merger or strategic transaction involving the company.Sector View1-Positive - sector coverage universe fundamentals are improving.2-Neutral - sector coverage universe fundamentals are steady, neither improving nor deteriorating.3-Negative - sector coverage universe fundamentals are deteriorating.Distribution of Ratings:Lehman Brothers Equity Research has 1834 companies under coverage.43% have been assigned a 1-Overweight rating which, for purposes of mandatory disclosures, is classified as a Buy rating, 32% of companies with this rating are investmentbanking clients of the Firm.40% have been assigned a 2-Equal weight rating which, for purposes of mandatory disclosures, is classified as a Hold rating, 5% of companies with this rating areinvestment banking clients of the Firm.17% have been assigned a 3-Underweight rating which, for purposes of mandatory disclosures, is classified as a Sell rating, 61% of companies with this rating areinvestment banking clients of the Firm.This material has been prepared and/or issued by Lehman Brothers Inc., member SIPC, and/or one of its affiliates (“Lehman Brothers”) and has been approved byLehman Brothers International (Europe), authorized and regulated by the Financial Services Authority, in connection with its distribution in the European EconomicArea. This material is distributed in Japan by Lehman Brothers Japan Inc., and in Hong Kong by Lehman Brothers Asia Limited. This material is distributed in Australiaby Lehman Brothers Australia Pty Limited, and in Singapore by Lehman Brothers Inc., Singapore Branch. (“LBIS”). Where this material is distributed by LBIS, pleasenote that it is intended for general circulation only and the recommendations contained herein does not take into account the specific investment objectives, financialsituation or particular needs of any particular person. An investor should consult his Lehman Brothers’ representative regarding the suitability of the product and takeinto account his specific investment objectives, financial situation or particular needs before he makes a commitment to purchase the investment product. This materialis distributed in Korea by Lehman Brothers International (Europe) Seoul Branch. This document is for information purposes only and it should not be regarded as anoffer to sell or as a solicitation of an offer to buy the securities or other instruments mentioned in it. No part of this document may be reproduced in any mannerwithout the written permission of Lehman Brothers. With the exception of disclosures relating to Lehman Brothers, this research report is based on current publicinformation that Lehman Brothers considers reliable, but we make no representation that it is accurate or complete, and it should not be relied on as such. In the caseof any disclosure to the effect that Lehman Brothers Inc. or its affiliates beneficially own 1% or more of any class of common equity securities of the subject company,the computation of beneficial ownership of securities is based upon the methodology used to compute ownership under Section 13(d) of the United States SecuritiesExchange Act of 1934. In the case of any disclosure to the effect that Lehman Brothers Inc. and/or its affiliates hold a short position of at least 1% of the outstandingshare capital of a particular company, such disclosure relates solely to the ordinary share capital of the company. Accordingly, while such calculation representsLehman Brothers’ holdings net of any long position in the ordinary share capital of the company, such calculation excludes any rights or obligations that LehmanBrothers may otherwise have, or which may accrue in the future, with respect to such ordinary share capital. Similarly such calculation does not include any sharesheld or owned by Lehman Brothers where such shares are held under a wider agreement or arrangement (be it with a client or a counterparty) concerning the sharesof such company (e.g. prime broking and/or stock lending activity). Any such disclosure represents the position of Lehman Brothers as of the last business day of thecalendar month preceding the date of this report.This material is provided with the understanding that Lehman Brothers is not acting in a fiduciary capacity. Opinions expressed herein reflect the opinion of LehmanBrothers and are subject to change without notice. The products mentioned in this document may not be eligible for sale in some states or countries, and they may notbe suitable for all types of investors. If an investor has any doubts about product suitability, he should consult his Lehman Brothers representative. The value of and theincome produced by products may fluctuate, so that an investor may get back less than he invested. Value and income may be adversely affected by exchange rates,interest rates, or other factors. Past performance is not necessarily indicative of future results. If a product is income producing, part of the capital invested may beused to pay that income. © 2006 Lehman Brothers. All rights reserved. Additional information is available on request. Please contact a Lehman Brothers entity in yourhome jurisdiction. May 2, 2006 4
  5. 5. Equity Derivatives Strategy | Sell ANF Put Spreads, Buy GPS PutsLehman Brothers policy for managing conflicts of interest in connection with investment research is available at www.lehman.com/researchconflictspolicy. Ratings,earnings per share forecasts and price targets contained in the Firms equity research reports covering U.S. companies are available atwww.lehman.com/disclosures.Complete disclosure information on companies covered by Lehman Brothers Equity Research is available at www.lehman.com/disclosures. May 2, 2006 5

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