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October 2, 2012  Tue 12:21 PM CT

ARO: SEE CHART GET CHAIN FIND STRATEGIES
Aeropostale has been range-bound for months, but traders are positioning for a potential decline in the next few weeks.

optionMONSTER's Depth Charge system shows that 8,796 October 13 puts have traded in a strong buying pattern today, including prints of 2,996 and 2,496 that went for $0.55. That volume was 7 times more than the strike's open interest of 1,239 contracts at the start of the session, clearly indicating new positions.

ARO is down 0.9 percent to $13.24. The apparel and accessory retailer gapped down from above $19 to about $13 after cutting guidance on Aug. 2, and shares have traded sideways since then.

Our systems did not detect any stock trades tied to today's option activity, though the puts could have been bought to hedge a long position established earlier. If not, they would be a straightforward bet that the stock will be roughly 6 percent lower than current levels at expiration in less than three weeks.

Overall option volume in Aeropostale is more than 16 times its daily average so far today. Puts outnumber calls by more than 11 to 1, a reflection of the day's bearish sentiment. (See our Education section)
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As discussed last week, when using the Stock Replacement Strategy to replace a stock position to trade direction, we want to use an option that has very similar characteristics to the stock. We talked about using the deep in-the-money, 80 to 85 delta option that is similar in the Greeks and has relatively little extrinsic value which tends to work against us in stock directional trading.

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