American Eagle Outfitters, Inc. After the (AEO) reported that it missed analysts’ earnings forecasts for the second quarter earnings report, option traders have taken action to suggest that they believe stock prices will continue to fall. This may be natural given that the stock price fell by more than 10% the day after the announcement.
American Eagle Outfitters reported earnings per share (EPS) of $ 600 million and revenue of $ 1.19 billion. Analysts expected EPS to be $ 550 million and revenue to be $ 1.22 billion. In addition, the e-commerce business of apparel companies slowed down by 5% year-on-year. Prior to the announcement, investors were bidding on AEO’s share price below the 20-day moving average.
Traders and investors have cut the AEO’s share price slightly before earnings. However, post-earning options trading activity shows that investors are less confident in the future AEO stock price. This is because while price behavior has fallen to the extreme, option activity and open interest suggest that traders are selling call options and buying puts.
- Traders and investors sold their shares in American Eagle Outfitters after receiving a financial report as their stock price fell by more than 10%.
- AEO shares closed well below the 20-day moving average.
- Put-and-call option activities seem to be positioned to keep stock prices declining.
- Volatility-based support and resistance levels allow for stronger upward movement.
- This setting creates an opportunity for traders to benefit from the reversal of earnings-based stock price declines.
Options trading is a literal bet on market probabilities. On average, this is a bet made by a trader who is more informed than most investors. The key to maximizing insight into options trading is understanding the circumstances under which price fluctuations have occurred. The graph below shows the price action on the AEO’s stock price as of September 10 and shows the settings after the earnings report. Prices are compared to State Street’s retail sector ETFs (XRTs).
In the one-month trend of AEO stocks, stocks temporarily exceeded the 20-day moving average twice, but only fell each time. It is worth noting that AEO performance was relatively consistent with XRT until mid-July, when stock prices were on a downtrend. Prices ended at the lower end of the volatility range shown in the technical survey on this chart.
These studies are formed by the 20-day Keltner channel index. These represent price levels that represent multiples of the average true range (ATR) of a stock. This array helps highlight how prices have fallen to the lower end of the volatility range.This price fluctuation Investors from AEO stocks mean they are losing confidence in AEO’s stock price in the future.
NS Average True Range (ATR) It has become a standard tool for expressing past volatility over time. The typical average time used for that calculation is a period of 10 to 20 which includes trading for 2 to 4 weeks on the daily chart.
Chart watchers can recognize that traders are pessimistic about their earnings based on AEO price trends below the 20-day moving average. Chart watchers can also comment on investor expectations by paying attention to the details of options trading. Prior to the announcement, traders seemed to expect AEO stocks to fall after earnings.
NS Keltner channel indicator Shows a set of semi-parallel lines based on a 20-day simple moving average and the top and bottom lines. This channel indicator is great for graphing past volatility, as the upper line is drawn by adding a multiple of ATR to the average and the lower line is drawn by subtracting a multiple of ATR from the average price. It will be a visualization tool.
Recent activity of options traders suggests that they consider AEO stocks to be overvalued, even at the lower end of the volatility range. As a result, traders sold calls and bought puts. Over the last five days, put options open positions have increased by 8.9%, while call options open positions have increased by 0.7% over the same span. It is important to note that Friday’s open interest featured over 107,000 call options compared to over 84,000 puts. Friday’s option volume also featured nearly 24,000 calls, compared to nearly 4,000 puts.
This nearly 6: 1 ratio, which usually favors call options, reflects bullish sentiment. However, the implied volatility of these options is declining, indicating that these options are selling more than they buy. Raw numbers are preceded by call options, which are historically percentages and are some of the highest open positions for put options that the AEO has had in the past year. This shows the overall bearish sentiment towards the AEO stock price.
These gauges represent the relative levels of open interest over the last 52 weeks. The higher the readings on these gauges, the higher the price of AEO options is now compared to the past year. Gauge readings now show that AEO options are relatively expensive, suggesting that option sellers currently have a pricing advantage.
The purple line in the graph is generated by a 10-day Keltner channel survey set to 4 times the ATR. This measure tends to create a highly correlated area of strong support and resistance in price behavior. These areas are visible when the channel line turns prominently within the last three months.
Turnmark levels are annotated in the chart below. It’s worth noting in this chart that the pricing of calls and puts is very different and there is enough space to run upwards. This suggests that option buyers have a strong belief that prices will fall in the coming weeks.
These levels of support and resistance show a wide range of support and resistance to price. As a result, significant movement can occur in either direction in the near future. After the previous earnings announcement, AEO shares rose 5.7% the day after the announcement and fell the following week. Stock prices can rise or fall more than expected in the short term due to the large amount of room for volatility. However, there is room in the volatility range to support upward movement.
The AEO exceeded analysts’ expectations for EPS, but the company missed its earnings forecast. The company’s e-commerce business was down 5%. As a result, investors sold the AEO, stock prices fell more than 10% and moved to the lowest volatility range. Stock prices were well below AEO’s 20-day moving average. Options traders seem to be selling calls and buying puts, which leads to a bearish outlook. However, this activity provides more room within volatility for future stock price increases.