American Eagle Outfitters (NYSE:AEO) completed its fourth-quarter earnings wrap-up last week but is now facing a new challenge: technical resistance. Options players are continuing to hedge their bets on the retailing name and today are focused on short- and intermediate-term calls.
Recent gains in the stock have brought it face-to-face with the 16-17 region, which has acted as technical resistance during the past year or so. This area contained all rally attempts during the first quarter before AEO began to spiral lower. AEO was rebuffed at this level again in early January (although a reduced earnings guidance didn’t help).
Now, the stock is challenging this region once again. In midday trading Monday, 13,000 calls have traded compared to 66 puts. That’s a call-to-put ratio of 197-to-1! Slightly less than half of these calls are trading at the ask price, according to WhatsTrading.com. That suggests that at least some of the activity is courtesy of call buyers.
The March 16-strike call (expiring on Friday) has seen 4,500 calls change hands versus open interest of 3,886. The May-dated 15 calls, meanwhile, have seen 6,500 contracts trade on open interest of 18,800. Long calls have unlimited upside if the underlying stock rallies, while downside is capped at 100% of the premium paid.
If these calls are in fact being purchased, it means the respective buyers expect AEO to be trading above the purchased strike when the options expire. This means staying above 16 through Friday and staying above 15 through May expiration in 67 days.
Breakeven for any call purchase is the strike price plus the premium paid to enter the trade. The March calls are currently bid at 30 cents, asked at 40 cents, while the May calls are bid $1.50, asked $1.60. The May calls not only have more time value, but they are in-the-money by an extra dollar.
Last Wednesday morning, AEO said it netted a profit of 35 cents per share in the latest reporting period, edging past analysts’ estimates by a penny (though falling short of the previous year’s results by roughly 20%). Full-year results missed analysts’ estimates as well, by a margin of nine cents. Sales, however, grew by 14% overall and 10% on a same-store basis to virtually match Wall Street’s outlook. Looking forward, AEO expects modest improvement in sales and a slight gain in margin.
Despite this mixed report, AEO moved 6.5% higher on Wednesday following the news and jumped out of the gate Thursday on potential insider-buying news. Investors hit the AEO options pits on Thursday, trading 52,000 calls and 10,000 puts. The January 2013 17-strike calls were especially popular as they were bought 37,000 times. This was likely the work of a covered-call trader closing out existing positions as the stock popped higher.
As of this writing, Beth Gaston Moon does not own any shares mentioned here.