Stocks quoted in this article:
Michael Kors Holdings Ltd's (NYSE:KORS - 50.94) 7.2% drop didn't go unnoticed by put players yesterday, as roughly 24,000 of these options were exchanged during the course of the session. This was 15 times the security's average daily put volume, and 1.5 times the number of calls traded. However, not all of this put activity was bearish in nature.
Garnering the most attention was the December 50 strike, where more than 6,100 puts crossed the tape -- the majority of them at the bid price, suggesting they were sold. These near-the-money bets changed hands at a volume-weighted average price (VWAP) of $3.50 each. Open interest at this strike rose by 5,585 contracts overnight, pointing to the initiation of new positions, and this option now holds peak put open interest of 5,926 contracts. By selling these puts to open, speculators are expecting the stock to remain perched atop the 50 strike through December expiration. In this scenario, the puts expire worthless, and the put sellers can pocket the credit received at the trade's outset. A move below the 50 strike would likely result in assignment for the put sellers, requiring them to buy shares of KORS for an effective per-share price of $46.50 (strike less the initial credit).
Meanwhile, sentiment toward KORS among the brokerage bunch is overwhelmingly upbeat. All nine of the analysts covering the clothing and accessories designer have handed out "buy" or better recommendations. What's more, Thomson Reuters shows an average 12-month price target of $63 for the security, representing expected upside of more than 24% to Thursday's closing price of $50.70.
KORS has put forth a solid technical performance in 2012, boasting a gain of about 86% year-to-date. The equity has also outpaced the broader S&P 500 Index (SPX) on a relative-strength basis during the past three months. However, the stock finished Thursday's session below its 50-day moving average for the first time since early August, thanks to the aforementioned decline.
It's also worth noting that KORS is scheduled to take its turn in the earnings confessional before the market opens on Nov. 13, and has easily topped consensus bottom-line projections in each of the past three quarters. Analysts are currently expecting a fiscal second-quarter profit of $0.40 per share. Another positive earnings surprise could result in a swift recovery for the shares, thus pushing yesterday's sold-to-open puts comfortably out of the money.