By Mike Yamamoto of OptionMonster
NEW YORK -- American Eagle Outfitters (AEO) has paused after rallying sharply in recent weeks, but traders are betting that the stock will resume its ascent.
OptionMonster's tracking systems detected the purchase of 4,000 October 16 calls for 11 cents on Friday. This is clearly fresh buying, as open interest in the strike was just 532 contracts before the trade appeared.
These long calls lock in the price where the stock can be purchased through mid-October no matter how far it might climb. They could be sold earlier at a profit if premiums rise before then, providing potentially significant leverage, but the contracts will expire worthless if shares remain below $16.
Many apparel retailers have been showing strength with back-to-school shopping, and American Eagle continued to climb after gapping up from around $11.50 after its earnings report on Aug. 20. The stock has been trading sideways at current levels for the last several days and was down 1.81% to $14.14 on Friday.
Total calls in the name outnumbered puts by 2.5 to 1 in the session. Total calls in the name outnumbered puts by 2.5 to 1 in the session. OptionMonster co-founder Jon "DRJ" Najarian cited the bullish option activity on CNBC's "Halftime Report" on Friday.
Najarian is long AEO; Yamamoto has no positions in the name.