Market Insights

Sydney Sweeney’s new ads powered a historic rally in American Eagle Outfitters, and options traders are jumping into the action.

TradeStation data shows more than 250,000 contracts changing hands in the retailer on Monday. It was the busiest session in over a decade. Calls accounted for a bullish 76 percent of the total.

Almost half the volume occurred in short-term contracts expiring this Friday, August 8:

• The 8-August 13 calls changed hands for as little as $0.05 shortly after the opening bell. Premiums climbed as the retailer pushed higher, hitting $1.05 near the closing bell. About 17,000 contracts were bought and sold, more than 25 times previous open interest at the strike.
• The 8-August 15 calls initially fetched $0.05, and climbed to $0.40. Volume of 16,691 contracts was more than 108 times open interest.
• The 8-August 14 calls saw premiums climb from $0.05 to $0.65. Turnover was also far above previous positioning.

Calls fix the price where investors can buy a security. They can gain value quickly when shares appreciate, but also expire worthless if a stock doesn’t move enough.

AEO rallied 24 percent to $13.28. It was the biggest one-day gain since August 2000, and the highest close since late February.

American Eagle Outfitters (AEO), daily chart, with select patterns and indicators.

The retailer has dropped after its last five quarterly reports as management struggles to find the right products for inflation-wary customers.  Short interest recently stood above 10 percent as traders looked for weak fundamentals to keep dragging on the stock.

That negativity may increase the importance of a catalyst like Sweeney’s ad campaign, boosting hopes of a turnaround and forcing bears to cover downside bets.

Investors following the company may focus on its next earnings report. While the timing hasn’t been officially announced, it is estimated for the morning of August 28.

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