AEO Option Traders Dressed for Earnings Success

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AEO Option Traders Dressed for Earnings Success

Ahead of the company’s fiscal second quarter results report, investors in American Eagle Outfitters, Inc. (AEO) have kept the share price range limited. At first look, it seems that option traders are well positioned for a bullish move, as the number of call options in the open interest exceeds the number of puts. If American Eagle Outfitters provides a favorable earnings surprise, the extraordinary option activity might trigger a significant upward trend in the price action.

The open interest for AEO indicates a rising amount of call options, and option premiums are exceptionally high. Trading volumes suggest that traders have been selling options and buying calls ahead of a strong earnings report. If these speculations fail to materialize, the share price of AEO might fall unexpectedly.

It is difficult to anticipate the path of a stock following results. A comparison of the stock’s price action and option activity, on the other hand, reveals that if AEO presents a poor report, the company’s share price might fall further, falling below its 20-day moving average following the announcement. This might occur when options are priced assuming an upward trend, but unexpected bad news could take traders off guard and cause a fast drop in share price.

Key Takeaways

  • Ahead of the results announcement, traders and investors have limited the share price range.
  • The stock has lately closed below its 20-day moving average.
  • The price of calls and puts predicts a greater move to the upside.
  • The volatility-based support and resistance levels allow for a more aggressive upward surge.
  • This setup provides traders with the possibility to benefit from an unexpected earnings outcome.

A comparison of the intricacies of stock price and option activity may provide chart viewers with useful information. However, it is critical to understand the environment in which this pricing behavior occurred. The chart below displays the price movement of the AEO share price on September 1. This resulted in the setting for the earnings report.

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Current Trends

Over the last month, the share price of AEO stock has risen above and fallen below its 20-day moving average, ending in the bottom third of the volatility range. During this time period, the lowest AEO share price was about $29 in late August, while the highest share price was around $35 in early August. The price settled at the lower zone shown by the technical studies in this chart.

The indicators used in the research are 20-day Keltner Channel indicators. These are price levels that are multiples of the stock’s Average True Range (ATR). This array emphasizes how the price fell below the 20-day moving average in the week before earnings. This price movement in AEO shares suggests that investor confidence is dwindling as the earnings announcement approaches.

Tip

The Average True Range (ATR) has become a widely used technique for illustrating historical volatility over time. The average amount of time employed in its computation is 10 to 20 time periods, which comprises two to four weeks of everyday trading.

In this context, where the price trend for AEO has closed below its 20-day moving average, chartists may see that traders and investors are expressing increasing pessimism about earnings. It’s worth noting that AEO’s share price has progressively decreased in the week before results. As a result, chartists must decide if the change reflects investors’ expectations for positive profits or not.

Option trading information may give extra context to chart viewers, allowing them to make an opinion about investor expectations. Recently, option traders have favored puts by a slight margin over calls. On Tuesday, roughly 2,300 calls were exchanged for every 6,300 puts. This volume often suggests that traders are pessimistic on the earnings release.

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Tip

The Keltner Channel indicator shows a series of semi-parallel lines based on a 20-day simple moving average, as well as an upper and lower line. Because the higher lines are produced by adding a multiple of ATR to the average price and the lower lines are drawn by subtracting a multiple of ATR from the average price, this channel indicator is an ideal visualization tool for displaying historical volatility.

Trading Activity

Option traders have priced their options on the assumption that AEO shares would close inside one of the two boxes illustrated in the chart between now and September 3, the Friday after the earnings report is announced. The price offered by call option sellers is shown by the green-framed box. If prices rise, there is a 37% chance that AEO shares will finish inside this range at the end of the week. The red box reflects the cost for put options, which have a 33% probability of going down after the announcement.

It is worth noting that the open interest ratio was over 100,000 calls to over 72,000 puts, illustrating the option traders’ bias. Calls were preferred over puts by traders. This demonstrates a positive attitude about AEO profits. However, given the call and put boxes are almost the same size, we may conclude that the large quantity of call options has only moderately biased expectations upward. A significantly more relaxed attitude is conveyed.

A 10-day Keltner Channel study set at 4 times the ATR yielded the purple lines on the chart. This metric creates closely connected price action zones of strong support and resistance. These areas appear when the channel lines have made a noteworthy turn during the last three months.

The levels marked by the turns are noted in the chart below. What stands out in this chart is how close the call and put prices are, with room to go either way but greater room to the upside. Even if recent put sales outnumber call volumes, this shows that option purchasers do not have a strong conviction about how the firm will report. Although investors and option traders may not anticipate it, a surprise report might cause prices to rise or fall drastically.

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These support and resistance levels demonstrate a wide variety of price support and resistance. As a consequence, any unexpectedly positive or unfavorable news might take investors off guard and result in an abnormally significant shift. Next the prior results report, AEO shares increased 5.4% the next day and continued to grow the following week. Investors may anticipate a similar upward price movement after this news. With so much opportunity for movement in the volatility range, share prices may increase or fall more than predicted.

Market Impact

Because AEO is a mid-cap firm, its earnings reports are unlikely to have a direct impact on indices. Whatever the study says, it’s certain to have an impact on companies in the clothes retail business. A strong report might boost similar-sized industry stocks like Victoria’s Secret & Co. (VSCO), Urban Outfitters, Inc. (URBN), or Boot Barn Holdings, Inc. (BOOT).It might also have an impact on exchange traded funds (ETFs) like iShares’ Core S&P Mid-Cap ETF (IJH), Invesco’s DWA Consumer Cyclicals Momentum ETF (PEZ), and iShares’ Russell 2000 ETF (IWM).

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