American Eagle Outfitters (NYSE: AEO) has had quite a run over the last few years. The company has seen some major downs. While certain retailers were able to make it through the last major recession unscathed, AEO was not one of them. The stock price fell in the mid-single digits, and for a while the outlook was that the company wasn’t flying like its namesake. The stock wasn’t high on the list of option trading enthusiasts. There were profit warnings, new 52-week lows, higher volatility, strikes with unions, and lawsuits between Abercrombie & Fitch (NYSE: ANF) and AEO.
While there is no love lost between A&F and Pittsburgh-based AEO, things do seem to be somewhat shinier. While the recession dragged on, AE0 was working on its products and its branding. While the company in many ways has given up on being as expensive as the Abercrombie & Fitch’s of the world, its lower price point and still trendy styles are a perfect combo to draw in the teens who may have lost some of those after-school, part-time hours.
The stock itself has followed the recent branding success of the stores. The stock has rallied into the mid-teens, topping out near $20 a few times. This rally has happened due to profitability, and of course, buy-out rumors. A company like AEO could be an attractive buy for a larger clothing store, or more likely a private equity group that wants to make the company leaner, meaner and even more focused.
Recently the company had to warn that it was going to miss revenues, sending the stock down below $15.00. Option traders do not seem to think that the stock is going to stay there. Over the past day there has been a noticeable increase in call activity across several strikes. The most notable of which was an AEO March 16 Call buyer who purchased more than 9,000 calls for around 39 cents with the stock in the high 14’s.
The buyers in March could be betting on a few things; it’s possible that AEO could bounce from low expectations, or that buy-out rumors could heat up again. Either is completely possible and would explain the call activity going on across the board. The 16’s are actually the cheapest options in volatility terms on the board. That said, AEO implied volatility (IV) is elevated right now for a non-earnings month.
This type of activity could signal that the stock is set for a short term increase in realized volatility, most likely to the upside. As a paper reader I make it a habit to follow the paper, especially in a stock that can have nice price swings. With AEO trading below $15, I think 40 cents for the March 16 calls, seems like a reasonable bet. One could sell the AEO Mar 17 or 18 Calls to defray some of the cost if one was so inclined. For those looking to take advantage of the elevated IV of the stock, now near 45%, a sale of the AEO Mar 14 Put might also make sense.
Follow Mark Sebastian on Twitter @optionpit.
