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Aeropostale Bears Forecast a Quick Decline

Front-month put volume picks up speed on ARO

by 10/2/2012 2:52 PM
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Aeropostale, Inc. (NYSE:ARO - 13.15) has been on the bearish radar today, as roughly 11,000 puts have traded so far, which is an impressive 47 times the equity's anticipated intraday put volume. By comparison, just over 900 calls have changed hands.

The bulk of the action has centered around the near-the-money October 13 strike, where more than 10,300 puts have been exchanged at a volume-weighted average price (VWAP) of $0.51 per contract. With implied volatility last seen almost seven percentage points higher -- along with the fact that today's volume exceeds current open interest levels -- it can be inferred that new positions are being implemented here. While several blocks crossed at the ask price -- signaling buyer-fueled activity -- a large percentage traded between the ask and bid prices, making it unclear as to whether they were bought or sold. However, regarding the bought-to-open puts, traders are expecting the stock to fall below $12.49 (strike price minus average net debit) by front-month expiration.

Today's put activity is a break from the security's recent trend, as data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows a 50-day call/put volume ratio of 7.23 for ARO. In other words, traders have bought to open more than seven calls for every put during the past few months. This ratio ranks in the 86th annual percentile, meaning speculators have picked up calls over puts at a faster clip just 14% of the time during the past year.

However, it should be noted that short interest on the teen apparel retailer rose by more than 8% during the past two reporting periods, and now represents close to 8% of ARO's available float. This raises the possibility that some of the aforementioned buy-to-open call volume could be the result of hedging activity by short sellers.

In terms of analyst coverage, sentiment among the brokerage firms is almost evenly split, with ARO sporting 11 "buy" or better ratings, compared to nine "holds" and one "strong sell" suggestion. Meanwhile, Thomson Reuters shows an average 12-month price target of $17.53, reflecting a 31% premium to Monday's closing price of $13.36.

ARO has been a technical laggard in 2012, having lost about 14% year-to-date, and trailing the broader S&P 500 Index (SPX) by about 35 percentage points during the past 60 sessions. On the charts, the stock has yet to reclaim its 40-day moving average, which has served as resistance since ARO's guidance-related bearish gap in early August. Today's put buyers need the security to drop another 5.3% by Oct. 19 to realize a profit on their bearish positions.

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