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Coach, Inc. (COH) Bounce Attracts Option Sellers

COH traders employed puts to place neutral-to-bullish bets

by 2/28/2013 9:26 AM
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The shares of Coach, Inc. (NYSE:COH - 47.82) gapped higher on M&A rumors yesterday, prompting a handful of speculators to gamble with short-term options. More specifically, traders sold April-dated puts to place neutral-to-bullish bets on the luxury retailer.

By the closing bell, COH had seen roughly 12,000 puts cross the tape -- a 50% mark-up to its average single-session volume. Garnering notable attention was the April 45 put, which saw more than 1,100 contracts change hands at a volume-weighted average price (VWAP) of $0.95. Most of the puts crossed on the bid side, and nearly all of the volume translated into fresh open interest, underscoring our theory of sell-to-open activity.

By writing the puts to open, the sellers expect COH to remain north of $45 through the next several weeks. In this best-case scenario, the puts will stay out of the money, and the sellers can retain the entire net credit received at initiation. However, should COH backpedal and breach the strike within the options' lifetime, the seller could be assigned, meaning he'd be on the hook to purchase the shares at the strike -- a premium to Street value.

From a broader sentiment standpoint, many option traders were employing more traditional measures to wax optimistic on COH, even before yesterday's jump. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculators bought to open almost twice as many COH puts as calls during the past two weeks. In fact, the equity's 10-day call/put volume ratio of 1.83 ranks in the 83rd percentile of its annual range, hinting at a healthier-than-usual appetite for bullish bets of late.

As a result, the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.20 stands higher than just 26% of all other readings of the past year, implying that near-term option traders are more call-biased than usual right now.

As alluded to earlier, COH muscled higher yesterday, bouncing from annual-low territory amid unsubstantiated reports that the firm could be looking to put itself up for sale. While the security notched a close atop its 10-day moving average -- a feat accomplished just once since its post-earnings bear gap in mid-January -- upward momentum stalled in the face of its 20-day trendline. Ahead of the bell, COH is pointed 0.6% higher.

Daily Chart of COH since January 2013 With 10-Day and 20-Day Moving Averages


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