Investors in American Eagle Outfitters, Inc. AEO need to pay close attention to the stock based on moves in the options market lately. That is because the Jan 20, 2023 $3.00 Call had some of the highest implied volatility of all equity options today.
What is Implied Volatility?
Implied volatility shows how much movement the market is expecting in the future. Options with high levels of implied volatility suggest that investors in the underlying stocks are expecting a big move in one direction or the other. It could also mean there is an event coming up soon that may cause a big rally or a huge sell-off. However, implied volatility is only one piece of the puzzle when putting together an options trading strategy.
What do the Analysts Think?
Clearly, options traders are pricing in a big move for American Eagle Outfitters shares, but what is the fundamental picture for the company? Currently, American Eagle Outfitters is a Zacks Rank #3 (Hold) in the Retail - Apparel and Shoes industry that ranks in the Bottom 15% of our Zacks Industry Rank. Over the last 30 days, no analysts have increased their earnings estimates for the current quarter, while five analysts have revised their estimates downward. The net effect has taken our Zacks Consensus Estimate for the current quarter from 41cents per share to 26 cents in that period.
Given the way analysts feel about American Eagle Outfitters right now, this huge implied volatility could mean there’s a trade developing. Oftentimes, options traders look for options with high levels of implied volatility to sell premium. This is a strategy many seasoned traders use because it captures decay. At expiration, the hope for these traders is that the underlying stock does not move as much as originally expected.
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