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A Speculative Bet Against Michael Kors

A bear put spread was constructed on KORS

by 7/26/2012 11:08 AM
Stocks quoted in this article:

Michael Kors Holdings Ltd (NYSE:KORS - 41.48) saw a pop in pessimism among options players on Wednesday. Yet, one skeptical options speculator appears to be limiting his risk in the event of an upside move in the shares.

KORS saw roughly 16,000 puts change hands during the course of yesterday's session -- about seven times its average daily put volume -- while only 1,463 calls crossed the tape. Looking closer, we find that two symmetrical blocks of several thousand contracts traded at the August 36 and August 40 puts, both marked "spread." The 36-strike puts traded closer to the bid price of $1.15, suggesting they were sold, while the 40-strike puts traded near the ask price of $2.85, implying they were bought. Considering open interest skyrocketed at both strikes overnight, it looks like the investor implemented a bear put spread on KORS for a net debit of $1.70.

This options strategist wrote the 36-strike puts to help fund the purchase of the 40-strike puts. By doing so, the maximum risk on the play is lowered from $2.85 (cost of the long puts) to $1.70 (net debit). The spread also lifts the breakeven line from $37.15 (bought put strike minus $2.85) to $38.30 (bought put strike minus net debit). The short puts also limit the maximum profit at $2.30 (the difference between strikes minus net debit), no matter how far KORS should fall below the $36 level. If the trader would have simply bought the August 40 puts, his profit would increase in step with the stock's decline below breakeven.

It is worth mentioning that the fashion designer will reveal its fiscal first-quarter earnings before the market opens on Aug. 14. Since going public in December 2011, KORS has exceeded Wall Street's per-share profit estimates in both of its previous quarterly reports. Perhaps this justifies the options strategist's decision not to go for an outright bearish play.

But KORS is no stranger to pessimism in the in the options arena. Speculators on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 1.31 puts for every call during the past 10 days, signaling that traders on these exchanges have shown a healthy appetite for bearish bets over bullish.

Elsewhere on Wall Street, short interest ballooned 36.1% over the most recent reporting period, and now represents a healthy 4.9% of KORS' available float. However, the brokerage bunch is bullish, plain and simple. All six analysts covering KORS have doled out a "buy" or better endorsement, while the average 12-month price target of $53 represents a 34% premium to Wednesday's closing price of $39.53.

On the charts, KORS has jumped some 52% in 2012, tagging a record high of $50.69 in early March. But since that time, the shares pulled back to the $36 region, and now find themselves trading in the $38-to-$42 region. In fact, over the past month, the stock has lagged the broader S&P 500 Index (SPX) by nearly 11%.


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