Option Trade 
American Eagle Outfitters (NYSE:AEO) Calls 
Tuesday, December 01, 2015

**OPTION TRADE: Buy the AEO Feb 2016 15.000 call (AEO160219C00015000) at approximately $1.40. Place a pre-determined sell at $3.00.

Note: No protective stop losses added -- but if you wish to do so make it $0.55.

by Ian Harvey

December 01, 2015

American Eagle Outfitters (NYSE: AEO), a mall-based retailer of apparel and accessories, will report quarterly earnings after the closing bell tomorrow, Wednesday 2nd December. Analysts are expecting earnings of $0.34 per share on revenue of $923.9 million. After a couple of tough years, the stock has performed well in 2015, with shares up 18.8% on the year.

The company has a winning streak of beating the estimate three quarters in a row. Wall Street says that American Eagle Outfitters is in the midst of a positive turnaround story, benefiting from dwindling competition.

Last quarter, this specialty retailer of casual apparel, accessories and footwear posted a positive earnings surprise of 21.4%.

After a splendid performance in the first half of fiscal 2015 backed by strong sales and earnings growth delivered by both the American Eagle and Aerie brands, American Eagle is optimistic about its third-quarter results as reflected by its guidance.

Plans to expand globally along with omni-channel growth will enable the company to improve its business and efficiently cater to international demand.

American Eagle Outfitters shares declined yesterday, losing -2.74 per cent to $15.95. Around 1.63 million shares changed hands in this session compared to an-average trading volume of 4.95 million shares.

It is in correction territory -- 11.3% below the 2015 high of $18.49, set on Aug. 18.

The stock had been below a "death cross" since Feb. 12, 2013, when the stock closed at $20.31. A "death cross" occurs when the 50-day simple moving average declines below the 200-day simple moving average, indicating that lower prices lie ahead.

This was reversed by a "golden cross," confirmed on Sept. 30, 2014, when the stock closed at $14.52. A "golden cross" occurs when the 50-day simple moving average rises above the 200-day simple moving average, indicating that higher prices lie ahead. This positive technical signal was in effect as 2015 began, and tracked the stock to its 2015 high of $18.49, set on Aug. 18.

Note that a price gap higher on March 4 was a positive reaction to earnings. The stock then gapped lower on Aug. 19 on a negative reaction to earnings, which was then exaggerated by the flash crash of Aug. 24. This four-day decline totaled 23.4% to the Aug. 24 low of $14.17, which held at a secondary low of $14.13 on Nov. 16. Since then the stock is up 15.7% to a test of its 200-day simple moving average of $16.56 last Friday.

Note that a "death cross" occurred on Oct. 10, which makes the 200-day a key chart resistance and makes the 50-day simple moving average of $15.73 a key chart support.

On a positive reaction to earnings, shares of American Eagle Outfitters will be above the 200-day and 200-week simple moving averages of $16.55 and $16.47, respectively.

With the stock's recent strength, AEO's valuation has risen, with the stock's P/E now sitting at 24.1. Analysts expect to see earnings continue to improve for the company, forecasting 7% earnings growth next year, which should keep the stock moving in the right direction.

During the current month, Wall Street 11 analysts said BUY the stock and Strong BUY signal was issued by 7 analysts. Sell rating was given by 0 analysts. Hold signal was recommended by 8 analysts. Underperform rating was given by 2 analysts.

The company has a median price target of $19.50, with the highest price target level of $24.00.

Harvey’s Options Volatility Indicator

Conclusion

American Eagle has done a good job of adjusting to changing consumer tastes, with the company topping analyst estimates the last three quarters. Some idea of what to expect can be gained from one of the company's closest competitors, Abercrombie& Fitch (ANF), which topped estimates on both the top and bottom line on November 20. It's been a volatile earnings season for brick and mortar retailers, but given the recent earnings strength, and ANF's results, it is believed that American Eagle can extend its streak of earnings beats.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

**OPTION TRADE: Buy the AEO Feb 2016 15.000 call (AEO160219C00015000) at approximately $1.40. Place a pre-determined sell at $3.00.

Note: No protective stop losses added -- but if you wish to do so make it $0.55.

”Success is simple. Do what's right, the right way, at the right time.”

Option Tip for your Success!
Options traders are not successful because they win.
Options traders win because they are successful.



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