IB Options Brief: American Eagle Outfitters, Inc. (AEO) & STEC, Inc. (STEC)

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AEO ñ American Eagle Outfitters, Inc.
Disappointing profit forecasts from the largest U.S. apparel chain, The Gap, Inc., as well as teen retailer Aeropostale, Inc. on Thursday are weighing down shares in American Eagle Outfitters today. Shares in AEO fell as much as 7.9% this morning to touch down at an intraday low of $13.46.

Bearish options traders were quick to take positions in American Eagle today with the teen retailerís first-quarter report scheduled for Wednesday ahead of the opening bell. Investors buying puts and selling call options on AEO today are likely to benefit post-earnings should the companyís performance in the quarter and forecasts for future results disappoint.

Bears sold more than 1,000 call options at the June $14 strike for a premium of $0.60 each. Call sellers keep the full amount of premium received on the transaction as long as AEOís shares fail to rally above $14.00 through June expiration. Investors selling the calls may be taking advantage of the sharp rise in implied volatility on the stock, which is currently up 16.6% at 47.26% as of 12:30pm in New York.

Meanwhile, put players purchased roughly 2,700 now in-the-money contracts at the June $14 strike for an average premium of $0.71 a-pop. Put buyers make money if shares in AEO slip beneath the average breakeven price of $13.29 at expiration next month. Bearish sentiment spread to the lower June $13 strike where some 1,500 puts were picked up at an average premium of $0.33 apiece.

Traders holding these options make money in the event that American Eagle shares fall another 5.9% from todayís low of $13.46 to breach the average breakeven point on the downside at $12.67 by June expiration day. Investors are trading roughly 3.6 put options on the teen retailer for each single call in play today.

 

STEC ñ STEC, Inc.
Options activity on the provider of products to storage and server equipment manufacturers was heavier-than-usual this morning with the price of the underlying stock soaring 14.5% to as high as $16.86. Investors employed a number of bullish trading tactics in STEC options, with a number of players picking up calls and others selling in- and out-of-the-money puts on the stock.

Traders expecting shares in STEC to rise ahead of expiration next month purchased around 1,500 calls at the June $19 strike for an average premium of $0.25 a-pop. Call buyers at this strike make money if shares surge 14.2% over todayís high of $19.25 to exceed the average breakeven price of $19.25 by expiration in June.

Out in the November contract, traders focused their attention on in- and out-of-the-money put options. Fresh positions, as evidenced by the excess of todayís volume over previously existing open interest, were initiated in the November $16, $17 and $18 strike puts.

More than 2,000 in-the-money puts changed hands at the November $18 strike against open interest of 193 contracts. It looks like at least half of the contracts sold for an average premium of $3.55 a-pop. Investors short the puts keep the entire premium received on the sale as long as STECís shares are trading above $18.00 by November expiration.

Traders selling the puts could have the stock put to them at an effective price of $14.45 each in the event that the put options land in-the-money and are exercised at expiration. Similar selling patterns were observed at the November $16 and $17 strikes as well, albeit in exchange for a lesser premium.


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