The shares of Aeropostale Inc (NYSE:ARO) have been on a tear during the past month, with ARO stock gaining more than 50% since early February. On Feb. 10, Aeropostale boosted its fourth-quarter earnings guidance to a range between a loss of 6 cents and a loss of a penny per share, with revenue expected to come in at $594.5 million.
Checking in on the numbers, the consensus is expecting a fourth-quarter loss of 4 cents per share from Aeropostale – near the middle of the company’s guidance. However, revenue is seen arriving at $577.75 million, below the company’s current target.
Overall, Thomson/First Call reports that only two of the 20 analysts following ARO rate the stock a “buy,” compared to 18 “hold” ratings and four outright “sells.” Additionally, the 12-month price-target of $3.50 represents a discount to the stock’s current perch near $4. If Aeropostale can live up to its prior guidance and issue a strong outlook going forward, ARO stock could be due for an upgrade or price-target increase, or two.
Short sellers are also betting heavily against ARO stock. As of the most recent reporting period, some 12 million shares of ARO stock were sold short. This represents a sizeable 21.8% of the stock’s total float, or shares available for public trading, and could spark a short-covering rally in the event of a positive fourth-quarter report.
There is also very little evidence of short-hedging, as ARO’s March/April put/call open interest ratio arrives at 0.70, with calls barely outnumbering puts among options set to expire in the front two months. That said, this ratio balloons to 1.93 when looking at just ARO’s March open interest configuration. The most popular strikes are the Mar $3 and $4 put strikes, as well as the Mar $3 call strike.
Click to Enlarge Implieds for ARO March options are pricing in a potentially sizeable post-earnings move of more than 11%. The resulting upper bound lies at $4.45, while the lower bound lies at $3.55. A rally would send ARO back to levels not seen since May 2014, setting up a potential showdown with long-term resistance at $5. A decline, meanwhile, would leave ARO perched above support at its 200-day moving average.
2 Trades for ARO Stock
Call Spread: Given the stock’s recent burst of strength, and the potential for current sales trends to continue for ARO, there is a possibility that the company could surprise Wall Street analysts and investors, resulting in an unwinding of “sell” ratings and short-interest. Such a development would make for an excellent contrarian play, and traders looking to take a risk on an ARO bullish trade might want to consider buying a Mar $3.50/$4.50 call spread.
At last check, this spread was offered at 42 cents, or $42 per pair of contracts. Breakeven lies at $3.92, while a maximum profit of 58 cents, or $58 per pair of contracts, is possible if ARO stock closes at or above $4.50 when March options expire.
Put Spread: On the other hand, the teen retail market continues to struggle, and other than February’s guidance,there is no reason to believe that Aeropostale stock can maintain its current bull run. For those looking to side with the bears, a March $3/$4 bear put spread has considerable potential.
At the close of trading yesterday, this spread was offered at 9 cents, or $9 per pair of contracts. Breakeven lies at $3.91, while a maximum profit of 91 cents is possible if ARO closes at or below $3 when March options expire.
Traders should also be aware that a double (at $3.82) or a triple (at $3.73) can be had well before ARO hits the lower bound ($3.55) offered up by March implieds, so be sure to set your limit orders accordingly in order to lock in profits.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.