Aeropostale (ARO) Challenges Resistance

Thursday night, apparel retailer Aeropostale (NYSE: ARO) announced earnings that topped analysts’ estimates by four cents per share, while revenue was in line.  The company also lifted its guidance for the first quarter and for fiscal year 2011.  Following this upside surprise, Piper Jaffray upgraded its rating to “neutral” (basically a hold) from “underweight” (essentially a sell).

In terms of price action, ARO is up nearly 18% since March 3^rd and is coming up on the 30 level.  At Friday’s close, the stock was up 4.2% for the day at $28.18.  The 30 area rejected the stock’s advances last fall, but ARO bulls are hoping the shares can power through this time around.

Unlike a stock trader (or a brokerage house), options traders aren’t limited to simply bullish, neutral, or bearish paths.  The wide variety of options strategies available means investors can trade based on volatility expectations or any number of projected scenarios.  Below are two examples of some ways options investors could trade ARO shares.  These are not buy-sell-hold recommendations – just a pair of potential strategies in the bullish and bearish camps.

Neutral-to-Bullish Option Strategy:  Long Call Spread

Investors on the side of Piper Jaffray – who think ARO may be looking up – could consider buying the July 24-29 call spread (buying the 24 call, selling the 29 call), which was priced for roughly $3.40 per spread in mid-afternoon trading on Friday.  This net debit is equal to the maximum potential loss, while the maximum potential gain is $1.60, or the difference in strike prices minus the credit collected.

The maximum profit is achieved if ARO is above 29 when these options expire (note that it doesn’t have to break the 30 level); maximum loss occurs if ARO breaches 24 to the downside.  If ARO is trading above $27.40 at July options expiration, the spread will be profitable.

Bearish Option Strategy:  Long Put

Those who disagree and prefer a bearish outlook could consider scooping up October 25-strike puts for about $1.80 apiece, where they were trading midday on Friday.  The put buyer will lose 100% of the premium paid if ARO stays above 25, but a move below breakeven ($23.20) could mean significant gains.  In the unlikely event that ARO drops all the way to zero, put buyers could realize a maximum theoretical gain of $23.20.

Whether or not you like the fashions at ARO, you may have an opinion on the stock.  Think it’ll take out the 30 level once and for all?  Or, like Aeropostale’s target demographic, is it likely to stay in the 20s for a while?

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