Monday, November 4, 2013

American Eagle (AEO) - Volatility Explodes to Uncharted Territory; What's Going On with AEO?

AEO closed Monday trading at $15.27, up 0.9% with IV30™ up 2.7%. The Symbol Summary is included below.

Provided by Livevol

American Eagle Outfitters, Inc. (AEO, Inc) is a specialty retailer that operates in the United Sates and Canada, and online at AEO, Inc operates under the American Eagle (AE), aerie by American Eagle (aerie), and 77kids by american eagle (77kids) brands. Through the Company’s family of brands, it offers clothing, accessories and personal care products.

I found this stock using a real-time custom scan. This one hunts for elevated vols.  I note that AEO is not only at an annual high, but a multi-year high and truly at levels that are essentially incomparable to the recent past.

Custom Scan Details
Stock Price GTE $5
IV30™ GTE 30
IV30™ Percentile GTE 80
Average Option Volume GTE 1,200

The goal with this scan is to identify short-term implied vol (IV30™) that is elevated to its own annual history (at least in the 80th percentile). I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), and I want a minimum vol level so I don't pick up any boring ETF’s (or whatever). The stock price requirement helps me identify names that have enough strike prices to trade or spread.

The two-year AEO Charts Tab is included (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Provided by Livevol

On the stock side we can see the stock rise from ~$13.50 to as high as ~$24, and then come all the way back to where it is now trad at $15.27.  Through that rather extreme stock appreciation and subsequent drop, the stock has seen several gaps (seethe yellow highlighted stock moves).  As recently as this August, the stock closed above $20.  But while the stock has been a over, this is all about the implied volatility.

Let's turn to the two-year IV30™ chart, below.

Provided by Livevol

If ever a picture was worth a thousand words... The IV30™ has absolutely exploded of late rising from 32.10% on 10-17-2013 to now 61.43% in about three weeks or a 91% rise.  Also, we can see the peaks in IV30™ with each earnings event (the blue "E" icons represent earnings dates) are considerably lower than the level right now.  So, what's going on?...

I don't actually know, but there are rumors that AEO is a takeover target.  I found an interesting post from and have included a snippet below:

2)    American Eagle Outfitters AEO +0.93% (AEO) has zero debt and currently is selling at very low multiples, based on enterprise value-to-free cash flow and enterprise value-to-ebitda. The company has a very strong brand name and is currently selling very close to its 52 week low of $13.14. When you consider previous takeover multiples in the retail sector, the incredible amount of free cash flow American Eagle generates (over $400 million last year), and the fact that they have zero debt, almost any private equity company should be interested in this stock. According to analysts, American Eagle is worth at least $20 on a takeover or a 52% premium from its share price.

Source: via Yahoo! Finance - Four Potential Retail Takeover Targets With At Least 50% Upside, written by Bryan Rich, Contributor.

OK, but then there was this very quick research note from ZACKS:

Investors have definitely seen some solid trading in American Eagle Outfitters (AEO) lately, leading to gains for some. However, AEO is now in overbought territory thanks to its latest move, as the firm has an RSI value of 70.7. Additionally, American Eagle Outfitters currently has a Zacks Rank #4 (Sell), so if the earnings estimate trend is any guide, a fall might be coming for this overbought stock.

Source: ZACKS via Yahoo! Finance - American Eagle Outfitters (AEO) is Overbought, What's Next?

OK, well, there you go.  Two totally different opinions, granted the timing of the articles was different (10-15-2013 for the former and 11-1-2013 for the latter).

Either way, something is going on with AEO that has the option market reflecting greater risk next 30 days than it has in the last two-years, and likely much further back than that.  Note that the 52wk low for this stock is $13.14, yet the Dec 12 puts are $0.20 bid.  That's a 63% IV for a stock with the following historical realized volatilities (i.e. the amount the stock actually moved annualized):

HV10™: 31.64%
HV20™: 30.74%
HV30™: 27.66%
HV60™: 33.71%
HV180™: 34.19%

So, in English, over a 10-, 20-, 30-, 60 and 180-trading day period the stock has never realized greater than 35% volatility (annualized) yet the implied volatility for the next 30-days is over 60%.  Something is afoot.

Finally, let's look to the Options Tab (below).

Provided by Livevol

Across the top we can see the monthly vols are priced to 65.54% for Nov, 57.98% for Dec and 53.71% for Jan'14.  I note that AEO has earnings due out at the end of Nov (in the Dec options expiry) yet the Nov volatility is priced above that event.

What's going with AEO? I dunno... But relative to it's realized stock movement and prior implied volatility, it is is in totally uncharted territory.  A big move is priced in... let's see...

This is trade analysis, not a recommendation.

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