American Eagle Outfitters (NYSE:AEO) is scheduled to report fourth-quarter earnings before tomorrow's open. Ahead of the event, the shares hit a four-year high of $20.83 out of the gate on tailwinds from a positive reaction to Abercrombie & Fitch (ANF) earnings, and were last seen up 0.3% at $20.54. The options market is expecting a volatile day of trading for the retail stock tomorrow, pricing in a 14.7% post-earnings swing, regardless of direction.
Looking at AEO's past earnings reactions gives mixed signals. While the shares gapped higher following the retailer's last two quarterly results -- averaging a 5.1% gain -- the four quarters prior resulted in sharp moves lower. In fact, in May 2017 the stock fell 14.7% in the session after earnings, and plunged 9.5% in this same quarter one year ago.
Diving into AEO sentiment suggests traders are betting on a post-earnings retreat for the stock. Since hitting a four-year low in early January, short interest has shot up 20% to 14.28 million shares. This accounts for a healthy 8.9% of the security's available float, or 4.4 times the average daily pace of trading.
And while call open interest of 46,042 shares is in the 95th annual percentile, it looks like a large amount of this activity is more bearish in nature. The May 20 call is home to peak open interest of 15,279 contracts, and Trade-Alert points to significant sell-to-open activity here back in mid-December.
Likewise, data from the major options exchanges indicates notable call writing at the weekly 3/9 23 strike in late February. While these speculators may have targeted a ceiling for the shares, the weekly call writers, in particular, may be betting on a post-earnings volatility crush.