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Ahead of Earnings, Bearish Speculators Converge on Aeropostale

Put players pay no heed to ARO's price-target hike

by 3/8/2012 11:52 AM
Stocks quoted in this article:

Wednesday's put players were apparently unfazed by Aeropostale's (ARO - 19.04) price-target hike to $22 from $19 at Brean Murray on Tuesday morning. More than 4,700 of these options were exchanged yesterday, reflecting eight times the equity's average daily volume. Most of the action occurred at the out-of-the-money March 18 strike, where 3,765 puts were traded. Open interest at this strike jumped by 1,931 contracts overnight, signaling the initiation of new positions. This option now holds peak put open interest of 6,082 contracts.

Digging deeper into the data, it appears that two blocks equaling 1,450 puts were sold at the aforementioned March 18 strike, while an equal number of calls were simultaneously sold at the March 19 strike. This activity suggests the implementation of a short strangle on ARO. By employing this neutral strategy, the trader is expecting the stock to finish between $18 and $19 by the time front-month options expire -- rending both contracts worthless, and allowing him to pocket the net credit of $1.28. However, should the stock move higher, his potential risk is theoretically unlimited. If the stock declines, his maximum loss is capped at $16.72 (put strike minus net credit received).

From a broader sentiment scope, calls seem to be the options of choice for the teen apparel retailer. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows a 10-day call/put volume ratio of 4.83 for ARO, confirming that calls bought to open have outnumbered puts by nearly five to one during the past two weeks. This ratio ranks in the 67th annual percentile, which means that investors have been snapping up puts over calls at an accelerated clip.

Meanwhile, although short interest on ARO plummeted by 31.72% during the last two reporting periods, these bearish bets still make up a lofty 12.22% of the equity's float. This raises the possibility that some of the recent call volume is the result of hedging activity by short sellers.

Technically speaking, ARO has gained roughly 25% year-to-date, and has outpaced the broader S&P 500 Index (SPX) by approximately 15% during the last 20 sessions. On the charts, the stock is on pace to finish a fifth consecutive week atop its 50-week moving average, a trendline that had been largely out of reach since last May.

It should also be noted that ARO is slated to take its turn in the earnings confessional after the closing bell today, and has bested analysts' bottom-line estimates in three of the past four quarters. At last check, the equity remains nearly flat with yesterday's close of $19.04.


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