Put Traders Should Speculate on This Retail Stock

Short interest still has room to grow

Nov 29, 2023 at 12:33 PM
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Subscribers to Schaeffer's Weekend Trader options recommendation service received this AEO commentary on Sunday night, along with a detailed options trade recommendation -- including complete entry and exit parameters. Learn more about why Weekend Trader is one of our most popular options trading services.

Retailer American Eagle Outfitters Inc (NYSE:AEO) just experienced a steep post-earnings bear gap, sending it back below its 50-day and 80-day moving averages and under its February and September 2023 closing highs. At the highest point in its negative earnings reaction, the stock hit $17.17, which is closing in on $17.40, or half its all-time high.

AEO WT Repost November 292023

Meanwhile, short interest has built since May, and could continue to grow given AEO’s recent drop. There’s also heavy call open interest at the 17- and 19-20 strike in the December/January series.
 
An unwinding of optimism in the options pits could provide headwinds as well. AEO’s 10-day call/put volume ratio of 5.01 at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) ranks higher than 92% of readings from the past year. Furthermore, the stock’s Schaeffer’s open interest ratio (SOIR) ranks in the lowest percentile of its annual range, pointing to a particularly strong call bias amongst options traders.
 
When weighing in on American Eagle stock, puts look like the ideal way to go. The security’s Schaeffer’s Volatility Index (SVI) of 33% ranks lower than 99% of readings in its annual range. This means options traders are pricing in extremely low volatility expectations.
 
Our recommended January 19, 2024 put has a leverage ratio of 7.04 and will double on a 13.8% drop in the underlying shares.

 

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