American Eagle Outfitters fell to multi-year lows on poor quarterly results today, returning big profits on bearish trades opened only one session earlier.
Investitute’s market scanners yesterday detected the purchase of 2,800 May $11.50 puts for $0.10 to $0.15 with shares at $12.97. The volume was well above the strike’s open interest of 1,289 contracts, indicating that this was fresh buying.
This afternoon those calls traded up to $0.55, a gain of about 300 percent in 24 hours. The stock declined some 15 percent in that time, illustrating how options can outperform their underlying shares.
Long puts lock in the price where a stock can be sold no matter how far it might drop, gaining value in a selloff with the potential for significant leverage. The contracts can be purchased either as an outright bearish bet or a hedge on a long-stock position.
AEO plunged 14.74 percent to $11.05 today. The retailer traded as low as $10.91 intraday, its lowest price since August 2014, after reporting earnings and outlook that missed expectations before the market opened.