AEO: Does a Spike in Call Volume Mean Bullish Action?

Takeover chatter can provide some exciting action in relatively quiet markets, as shares start to whip around and options flow accelerates. American Eagle Outfitters ( AEO) is one name that pops up on the radar on occasion, and while shares are several dollars above the $10 lows set last month, they are still well below the $15ish levels seen for much of the year.

Chatter of a possible leveraged buyout (LBO) made the rounds yesterday as reported by briefing.com and call buyers wasted no time getting involved, trading nearly 17,000 February 15 calls for an average price of $0.60. Call flow is heavy again on Tuesday morning, with another 16,000 February 15 calls trading for $0.60 as shares traded near flat at $13.23.

So does this spike in call volume indicate some big upside catalyst on the horizon? In this case I'd say not because the flow appears to be closing out some calls shorted on July 7 for $1.10 when shares were above $14. The buyer may have been spooked into action by the chatter, or simply content taking a 50% gain on their trade, but either way this looks like a move worth fading. I like the December 14 calls as a possible sale for $0.60 outright. I'd set a stop loss at $1.00 if shares lift. The trade certainly entails significant risk if a buyer were to surface, so I'll keep the trade small. Earnings are expected the day before November expiration, so I'd grab any chance to close for $0.25 before then.

Trade: Sell to open 3 AEO December 14 calls at $0.60.

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At the time of publication, Henry Schwartz held no positions in the stocks or issues mentioned.

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