Wednesday, May 18, 2011

Aeropostale (ARO) - Collapsing Stock With a Pattern

ARO is trading $21.42, up 1.3% with IV30™ up 4.3%. The LIVEVOL® Pro Summary is below.


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Aeropostale, Inc. is a mall-based specialty retailer of casual apparel and accessories. The Company designs, markets and sells its own brand of merchandise principally targeting 14 to 17 year-old young women and young men.

On 5-5-2011 the stock collapsed $4.20 (19.7%) down to $21.29 on a revenue growth disappointment for April. Oddly, this stock tends to gap down every three months, then recover, and then do it again.

Today, the company has traded over 30,000 contracts on total daily average option volume of just 4,053. The action has been in a July 19/23 risk reversal (sell puts/ buy calls) and paying $0.35 against $21.41 stock. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates that the calls and puts in Jul are mostly opening (compare OI to trade size). I don't see any OI larger than 3,600 on any of the relevant lines in any month, so this volume is quite substantial.

The Skew Tab snap (below) illustrates the vols by strike by month.

With the dipping stock price the Jun skew actually points to elevated upside risk rather than down. As I mentioned in the intro, the stock does tend to follow a "collapse-and-recover" pattern. The skew difference between Jun and Jul in the OTM calls is ~5 vol points.

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

We can see the three times in the last six months that the stock has gapped down on earnings (or revenue) news. The prior two, the stock has recovered almost the full value back within the following three months.

Possible Trades to Analyze
1. Trade like history repeats itself:
Obviously, history does not necessarily repeat, but if it does -- selling the upside calls and buying stock could prove an interesting bet. Taken a step further, buying stock and selling the elevated Jun OTM calls against the slightly depressed Jul OTM calls could win with vol and delta.

2. Heed order flow:
The large order flow sells the downside to fund the upside. In English, it's a bet very similar to the pattern that the stock has followed. One spin on that order flow which might be worth examining is to sell the elevated vol puts and calls in Jun and purchase the calls in Jul. If that trade works out, then sell the puts again in Jul. Of course, that's naked the downside twice.

This is trade analysis, not a recommendation.

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