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Proceed with Caution on those Abercrombie & Fitch Rumors: Trader

On the heels of a much better than expected Consumer Confidence read for November, options traders have ramped up volume on renewed speculation of a pending take-over of teen retailer Abercrombie & Fitch. Trading has been focused on the near-dated contracts. Volume has been above average, up more than 200% from normal, and the sentiment is bullish. This latest round of speculation in the options markets started on Monday, November 22nd.

Abercrombie & Fitch
Paul Sakuma
Abercrombie & Fitch

However, one Options action trader warns to proceed with caution on trades such as this. "For every one winner there are untold losers," says Mike Khouw of Cantor Fitzgerald. "I generally don't encourage people from chasing the options volumes on deal rumors like this."

Rumors of a pending deal started over six weeks ago when Goldman Sachs published a equity research report raising the 6-month price target to $48/share. The report also examined the potential for a leveraged buy-out of ANF, noting the potential for international growth and turnaround in the U.S. markets. In the weeks since this report, moves in ANF share prices have often been explained by citing the rumor of a imminent announcement of a deal by market participants. While speculation has centered on acquisition of $60/Share, one analyst familiar with investors thinking believes this price is too low. "$75 a share, or 15 times 2012 earnings of $5/share is where most long-term investors think this stock is headed," says the analyst.

Howver, today the rumors have resurfaced, this time bolstered by speculation that ANF had pulled out of an investment bank conference presentation. "Abercrombie certainly makes a lot more sense than some of the other targets out there," says Senior Retail Analyst Robert Samuels at Phoenix Partners Group. "I just met with them a few weeks ago, and they weren't canceling on me."

Calls to Abercrombie & Fitch for comment have not been returned so far.

Questions, comments send them to us at: optionsaction@cnbc.com

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