$AEO · Verified Investing · 2026-10-26

It will be on American Eagle stock. One of those consumer companies. Do you shop there often? yes, that was their stock looking to break through at the moment . And, as you know, it's seasonal.

This is American Eagle. As we can see today, there is a large green band, with the stock rising by four to four and a half percent, and almost 5% so far. wow . It's been a great day so far.

So, what am I looking at? Okay, I'm looking at a certain pattern; first we see this downward trend line . This is the white line here. He has been rejecting the price all year since March.

Then more recently in October, we started to see a sharp upward movement when we recorded these new lows here.

After we witness sharp downward movements, expect sharp upward movements. Now we get that sharp upward movement. And with that sharp upward movement , we observe a lot of lateral consolidation.

Here at Verified Investing, we call this a " bull flag". An upward trend. As we can see, the price is now executing that flag and pushing upwards.

With that said, let’s imagine that we actually own 100 shares. So we are already buying 100 shares here in American Eagle. Hmm. We are happy because it is upward because we are optimistic.

That's why we bought the shares, to own them. And we continue to let it continue.

Now, from here, what we want to start with is: what is measured motion? What does this pattern tell you, Jake? How high could the price go?

So, let's draw a trend line together. I'm going to start from this move here where the price has started to rise vertically in a real way and we're going to the top of that pivot.

Good? This, for your sake, serves as a flagpole. And then you can sort of draw out this trend line. Let's see if this works for me.

Good. We got that pattern. So, we take the measured motion from the bottom of the mast to the top of the axis here. Ah, yes. Then we place that flagpole under the flag piece here.

Now, you might be wondering: " What part of science are you talking about ?" Okay, let's figure that out together. We start from this top pivot point and move downwards slightly.

It's okay if we skip some of those points or wicks, but not the candle bodies . And here too. Okay . Good. Are you guys starting to see the emerging science model we're talking about ?

Here too, you need a flag piece that slopes downwards slightly, and that's what we have here. So, the price accumulates and becomes buoyant, then it surges upwards.

What you don't want to see is a flag model where the flag is higher than parallel or at a 45-degree angle upwards. If your science section looks like that and opens like an alligator's jaw, then this is not a standard educational model.

You want a flag pattern that slopes slightly downwards with that narrow overhang.

Okay, so where is the price headed now? I know we waited a little while for that. Let's try using a horizontal line now. We move to the bottom of that flag and to the top of the area from which the pattern broke through, and let's link this to the price movement.

As you can see . Oh, how wonderful. Right here, at the very top of this pivot point . Beautiful. At approximately $19.90, $20, which is the whole correct number. Good.

With this, we are already pressing at 18.77. So, if this model is successful, we still have an additional measured move of $1 to $ 1.20 for this price movement.

As I said, guys, I want you to act as if we own 100 shares here, is that clear? We only own 100 shares of " American Eagle" and we will set this level at 18.

Here I am thinking of buying a put option, and I will explain more when we delve deeper into understanding the protective put option . However, here we own 100 shares and we choose an execution price of 18 for the put option.

This roughly means that if the price returns and closes below the flag pattern from which it originated, the pattern becomes invalid, and here we seek to protect our losses by owning shares.

So, yes, as I said before, when we talk about a protective sell option , you must own the shares first. I want you to imagine a world where we just bought American Eagle stock.

Certainly, we can continue here and assume that we bought it at the level of 18.77, which is approximately its price now. Good. Do you understand that? So, we own those shares.

Now, I want to get insurance against those shares that I already own. Good. What I am doing here is buying a put option on the downside to protect myself with regard to the stocks I own.

This is the nature of a full-blown protective sell option.

Okay, and I confirm that we should own 100 shares. It can't be 90, nor 75, nor 99. We must own 100 shares because 100 shares are equivalent to how many option contracts? One. That's right, one.

So, if we have 100 shares, we can buy one put option , and thus we are fully covered against the decline.

If you have 200 shares, or 300 shares, of course you will have to increase the volume, and get two or three additional contracts. Yes. So, yes, a protective put option is, in short, insurance for the shares you already own, one put option for every 100 shares.

When do we use this option ? We are optimistic in the long term, but we want to sleep peacefully at night. Let's assume there's a volatile week ahead, or an earnings announcement, or a Fed decision like this week, but we still want to stay in the market.

We don't want to sell our shares and exit, okay?

Yes, that's exactly right. It helps in case of a market downturn. Now, this gives you the right to sell those shares at the strike price, okay? So, even if the stock continues to decline, let's say American Eagle shares drop to 15 or 10, we will still be protected because we bought the put option.

Great, we've got that protection. exactly . So, this might help if you're investing in more volatile names. AEO stock is relatively less volatile, but perhaps some semiconductor or technology stocks are much more volatile.

Okay, I'm looking at the "AEO" stock here. Although we are optimistic, we are not looking to buy a call option . We are trying to buy a put option here. important. I am not looking forward to a weekly contract until the bullish flag pattern is complete.

It may have been, as you know, settled into this bullish flag pattern for about two weeks. So I need at least a month or two . Good. Looking at December. December, in 53 days. Let's see. 23 days.

We expect it to rise to the level of 19.90. Yes, we hope so, you know, that's the best-case scenario. But we are looking at the execution price of 18 for the sell side because this is when the pattern will break and return to the downside. that. Good.

With this date, December 18th, I am looking at... important. Our delta here is close and reaches approximately -0.37. A little close, yes. Not close enough. January 15th. January. important.

Yes, I will not buy extra time for this option just because I think this may really rise sooner rather than later as it already is.

Also, consumer spending will likely start to increase for American Eagle. We'll see. That's why I'm going to keep this until Christmas. But I'm looking at the execution price of 18 here.

The difference between them is approximately 1.25 . So if we buy this. We can buy one of these put options for approximately, sorry, this is for sale. Approximately $125.

As for our Delta, I'm going to go a little over the Delta limit, but given how cheap this contract is, it's not too far off .

Also, because this provides greater protection against downside risks, and not necessarily exposure to my trading, I am trying to achieve balance by owning those stocks. I will buy this put contract at approximately $125, which is the average price between the bid and ask.

Yes, that's today's plan. The volume of buy and sell contracts traded today indicates an upward trend, as does the open interest.

Therefore, we are placing a protective put option on American Eagle Outfitters (AEO) shares. Our thesis is that we are optimistic about breaking through the bullish science model.

So, that's why we bought this insurance. We are not betting against the stock.

The setup is that we own 100 shares at a price of 18.71, and we buy a put option for December 18 at a price of $18, which costs about $1.26, which is very cheap for us , and that's great.

Or, let's see, the support level is at 16.74. The break-even point is at 19.97. Our maximum loss on the put option is $126.

The reason for choosing this option is that the trading volume confirms the upward trend. The implied volatility rating ( IV) is 22, its price is cheap, there are 53 days for this thesis to be realized , and the $18 level is under the flag.

Therefore, any decrease will trigger insurance, and that's what we have.