Risk Reversal Trades on American Eagle Outfitters (AEO)

Shares of American Eagle Outfitters (AEO) are trading higher on the session by 1.81%, at $21.39. The stock had been moving sharply higher over the past six months as sales rise at the teen retailer.

Things have actually been going so well for the company that it recently paid a special dividend of $1.50 on September 24^th. Shares have been consolidating since, though one trader sees the stock continuing higher into 2014. 

A short while ago, the January 2014 $22.00 call was purchased 5,000 times, on the offer, for $3.10 just as the January 2014 $18.50 put was sold 5,000 times, on the bid, for $2.35. This is known as a bullish risk reversal, a highly leveraged trade that takes a long position for a fraction of the outlay for shares.

The trader offset the cost of the risk reversal by selling the Jan2014 $30.00 call, on the bid, for $0.55. 

The trade’s strong bullish bias is in conflict with other trades that have been implemented on the name as of late, namely premium selling on the upside. For instance, the November $22.50 call was recently sold 1,400 times, on the bid, for $0.55.

Near-term implied and historical volatility is registering 30% and 23%, respectively.

American Eagle Outfitters, Inc. is a specialty retailer that operates in the United Sates and Canada, and online at ae.com. AEO, Inc operates under the American Eagle, aerie by American Eagle and 77kids by american eagle brands. 

About Michael Zerinskas

Originally from Chicago, Michael J. Zerinskas began his career as an intern for a small high-frequency trading firm based at the CME; he then moved on to become Chief Options Strategist at Benzinga.com. Michael is now Unusual Activity Editor at The Options Insider, specializing in VIX, volatility, and flagging unusual activity.