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American Eagle Outfitters (NYSE: AEO - option chain) shares are rising today after the company updated its Q2 EPS forecast to 16 cents, including a 2-cent tax benefit. AEO had previously forecast EPS of 12 to 15 cents, while analysts are expecting EPS of 14 cents. AEO also announced July same store sales that declined more than expected, but that news was offset for traders by the revised forecast. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on AEO.AEO opened this morning at $14.50. So far today the stock has hit a low of $14.40 and a high of $14.95. As of 11:30, AEO is trading at $14.70 up 74 cents (5.3%). The chart for AEO looks neutral and S&P gives AEO a neutral 3 STARS (out of 5) hold ranking.
For a bullish hedged play on this stock, I would consider a September bull-put credit spread below the $12.50 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in six weeks as long as AEO is above $12.50 at September expiration. AEO would have to fall by more than 15% before we would start to lose money. Learn more about this type of trade here.
AEO has not been below $12.50 since April and has shown support around $13.50 recently.
Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in AEO.
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