IB Options Brief: American Eagle Outfitters, Inc. (AEO) & Amkor Technology, Inc. (AMKR)

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Massive Trade In American Eagle Calls Commands Attention


AEO ñ American Eagle Outfitters, Inc.
Options on apparel retailer American Eagle are some of the most active today after one big player traded 65,000 February contract call options on the stock. Shares in the name surged 9.1% to an intraday high of $14.32 after June retail sales for apparel and teen stores came in far better than estimated. The run up in the price of the underlying today as well as the rise in implied volatility on the stock seem to have set the stage for the massive position initiated in AEO options.

The trader sold some 65,000 calls at the February $15 strike, against nearly nonexistent open interest, to pocket premium of $1.10 per contract. Premium received on the trade amounts to $7.15 million, which the investor keeps as long as the calls expire worthless at expiration next year. The investor responsible for the transaction sees shares likely trading below $15.00 over the next eight months, but is on the hook to deliver a staggering 6.5 million shares of stock should the calls land in-the-money at expiration.

American Eagleís shares spent the majority of their days trading above $15.00 from around February 10 through May 5. It seems reasonable to suspect the stock could once again rally above that level, particularly given the occasional bouts of takeover rumors that have pushed shares higher in the past. The enormity of the transaction and the risk of potentially needing to fulfill the contractual obligation to deliver stock at $15.00, regardless of how expensive shares could be in the open market at that time, may mean the investor responsible for the trade is long the stock and selling covered calls.

In this scenario the trader is happy to pocket the rich premium available on the options given the length of time to expiration and increase in implied volatility on top of the sharp rise in the price of the underlying. The short stance in the calls caps the investorís profits in the event that shares continue to soar through expiration. But, the investor could choose to buy back the calls at some point ahead of expiration thereby avoiding risks involved at exercise.

Closing out the short calls gives him the opportunity to maintain long exposure and potentially keep some of the premium if he buys back the calls for less than $1.10 each. Alternatively, a naked short position in 65,000 calls leaves the party exposed to unlimited losses to the upside above a breakeven share price of $16.10.

 

AMKR ñ Amkor Technology, Inc.
The number of call options traded on Amkor Technology as of 1:00 pm on the East Coast is more than twice that of overall previously existing open interest on the stock. The burst of options activity on the provider of semiconductor packaging and test services shoved options implied volatility on the stock up 47.8% to 62.82%. Shares in the Chandler, AZ-based company are currently trading at their highest of the day, up 7.95% at $6.38 in early-afternoon trade.

Investors dabbling in Amkor options focused their attention on the August $6.0 strike call, exchanging more than 20,000 in-the-money calls at that strike against paltry existing open interest of 114 contracts. Most of the call options appear to have been purchased for an average premium of $0.56 each. Plain-vanilla call buyers stand prepared to profit should shares in Amkor Technology rally another 2.8% to surpass the average breakeven price of $6.56 by August expiration day.

Amkor reports second-quarter earnings after the final bell on August 4. Light, albeit bullish, trading in the August $7.0 strike call suggests other market participants were willing to shell out $0.20 in premium to secure the right to purchase shares in Amkor at $7.00 through expiration next month. Traders long the higher-strike calls profit if shares in AMKR surge 12.9% over the current price of $6.38 to exceed the effective breakeven price of $7.20 at expiration.

 
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