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Kohl's Option Players Bet on a Bounce

Are KSS shorts hedging with front-month calls?

by 10/4/2012 11:10 AM
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Calls have been the options of choice on Kohl's Corporation (NYSE:KSS - 51.27) in recent weeks, as evidenced by data at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Over the course of the past 10 sessions, traders have bought to open more than 12 calls for every put. What's more, KSS' call/put volume ratio of 12.12 ranks higher than 98% of other such annual readings, indicating bullish bets have been scooped up over bearish at an accelerated clip.

This trend is echoed in KSS' falling Schaeffer's put/call open interest ratio (SOIR). Since Sept. 24, the stock's SOIR has dropped to 0.90 from 1.28, as near-term call open interest jumped 53.8%. Plus, this current ratio is ranked lower than 94% of similar readings taken in the last year, implying near-term traders have rarely been more call-heavy toward KSS.

Calls were certainly preferred over puts throughout yesterday's session. Roughly 19,000 call contracts changed hands, representing more than 10 times the average daily call volume, as well as three times the number of put contracts traded.

Short-term speculators turned their attention to the October 52.50-strike call, which saw around 9,500 contracts trade. The majority of these crossed at the ask price, and open interest added more than 5,700 new positions overnight, confirming our theory of buy-to-open activity. By initiating these long calls, speculators will profit with each step north of $53.55 (the strike plus the volume-weighted average price of $1.05) through October expiration. This is a 4.4% improvement over the equity's current level.

With KSS sitting on a modest 3.9% year-to-date advance, some of this recent call activity may simply represent short sellers picking up hedges against their pessimistic positions. Short interest accounts for a healthy 7.2% of the stock's float, and it would take more than a week to cover these shorted shares, at the equity's average daily trading volume. This morning's retail sales results for September may have been a catalyst for this cautious stance by shorts, although they needn't worry. KSS posted a dismal same-store sales decline of 2.7%, far below analysts' estimates for a modest increase of 0.1%.

As a result, the stock is down nearly 2% in today's session. Adding to the pressure is KSS' 20-day moving average. After ushering the equity higher throughout July and August, this trendline changed faces in late September, and has proven itself as staunch resistance over the last two weeks. Option activity is heavy as well in today's session, with both call and put volume running more than 10 times above the expected intraday levels. Most notable is the November 52.50 call, which is seeing activity on the opening side, split between the bid and the ask prices.

At last check, KSS was hovering near the $51.27 mark.

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