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Mid-Cap Options Update: American Eagle Outfitters (AEO)

An American Eagle Outfitters (AEO) speculator is betting on near-term downside

by 3/19/2014 2:35 PM
Stocks quoted in this article:

The 20 stocks listed below are the members of the S&P MidCap 400 Index (MID) that have seen the highest total options volume (calls and puts combined) during the past 10 trading days. Data is courtesy of Schaeffer's Senior Quantitative Analyst Rocky White. One mid-cap name seeing some attention among put buyers today is struggling apparel retailer American Eagle Outfitters (NYSE:AEO).

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AEO is trending higher today -- a change of pace for the underperforming security -- and bearish options traders are seeing this as an opportunity to swoop in. Over 2,200 puts have changed hands today, more than tripling call volume.

About two-thirds of the put volume has crossed at the May 13 strike, as two simultaneous blocks totally 1,400 contracts traded at the ask price of $0.85. Implied volatility ticked 2.1 percentage points higher at the time of the trades, suggesting the at-the-money positions were being purchased to open. Essentially, the put buyers are betting on the retailer to continue shuffling lower through May options expiration. The price point in focus is the $13 level, which isn't a far cry from the stock's two-year low of $12.56, reached last Wednesday.

American Eagle Outfitters (NYSE:AEO) shares are continuing to shake off last week's 11% pullback, which was spurred by a disappointing earnings report and a number of analyst downgrades and price-target cuts. This recent drop merely exacerbated long-standing weakness, however, as the shares are off roughly 35% on a year-over-year basis.

Even against this backdrop of lackluster price action, the longer-term trend in AEO options pits has been toward long calls (today's put buying notwithstanding). AEO's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio of 4.27 stands in the top one-quarter of all comparable readings taken during the last year. In other words, more than four calls have been purchased to open for each put during the last 10 weeks. As nearly 9% of the stock's float has been sold short, however, it is possible that some of the call speculation has been the work of short sellers looking to hedge their bearish bets.


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