American Eagle Outfitters, Inc. (AEO) is a global retailer for clothing and personal care products. The stock is currently trading at the upper end of its 52 week range of $10.12-$18.12 around $15.68. The stock has been trading strongly this year relative to the market with shares appreciating around 13% year to date. AEO is scheduled to report earnings before the bell tomorrow, and the stock is looking fairly weak ahead of the release. AEO is lower on the session by around 1.9% ahead of the report.

The stock is likely lower today due to American Eagle’s weak historical record on earnings day. Over the past 12 quarters AEO has sold off on earnings day 8 times with an average move of 8.17%. The stock has also sold off 7 times in 12 quarters from earnings day to the nearest options expiration. AEO also appears very weak on a chart going into the release. The stock is trading at the bottom of the Ichimoku Cloud on the daily bar, and looks as if it could break to the downside in today’s session. Due to the stock’s historical performance on earnings day and weak technical data, it is hard to justify anything but a bearish trade in AEO.

The options market is currently implying a move of around $1.45 or 9.1% in AEO by this Friday’s close giving us a downside target around $14.23.

Potential Bearish Earnings Trade: Buying the AEO May 22nd Weekly 15-14 Put Spreads for $0.25
Risk: $25 per 1 lot
Reward: $75 per 1 lot
Breakeven: $14.75

Andrew Keene

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