Now may be a good time to bet on AEO with puts
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.
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.