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Aeropostale Appeals to Bears Ahead of Earnings

ARO sees a rare spike in put volume

by 5/8/2012 2:31 PM
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Aeropostale, Inc. (ARO - 19.75) is on the bearish center stage today, as more than 3,500 puts have crossed the tape so far, which is nine times the equity's anticipated intraday volume. The bulk of the action has centered around the near-the-money May 20 strike, where over 2,500 of these puts have been traded -- all of them at the ask price, pointing to buyer-fueled volume. Currently, this option carries open interest of just 902 contracts, making it safe to assume that new positions are being initiated here today. In order for speculators to collect a profit from these bought-to-open puts, the stock must extend its decline below $20 through front-month expiration.

This uptick in put activity is unusual for ARO. The equity's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio stands at 7.20, confirming that traders have bought to open more than seven calls for every put during the past two weeks. This ratio arrives in the 79th annual percentile, signaling that investors have been picking up bullish options over bearish at an accelerated clip.

However, it should be noted that short interest on the teen apparel retailer increased by 15.7% during the last two reporting periods, and now accounts for a lofty 11.6% of ARO's available float. This could be an indicator that short sellers looking to hedge their bearish bets are contributing to some of the recent buy-to-open call volume.

ARO has been an outperformer on the technical front lately, having advanced by over 30% so far this year, and besting the broader S&P 500 Index (SPX) by more than 18% during the past 60 days. On the charts, however, the stock is on pace to finish the week beneath support at its 10-week moving average for the first time since early January.

In the afternoon hours of the session, ARO is down about 4.5% to explore the $19.75 area. The retailer is due to report first-quarter earnings next Thursday, May 17 -- just before front-month options expire.


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