Will Michael Kors Holdings Ltd (KORS) Earnings Burn Option Bears?

Traders have been taking a bearish approach toward Michael Kors Holdings Ltd (KORS)

Aug 9, 2016 at 11:07 AM
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Retailers are highlighting this week's earnings schedule, but so far, not all of the results have been positive. For instance, Coach Inc (NYSE:COH) is sliding today after a mixed turn in the confessional. Meanwhile, Michael Kors Holdings Ltd (NYSE:KORS) is preparing to release its fiscal first-quarter earnings before the open tomorrow, and it looks like plenty of traders are betting the stock will follow in the footsteps of its rival. At the same time, pent-up pessimism toward the stock could also unwind in the event of a KORS earnings beat, creating tailwinds for the stock, and burning bears both in and outside of the options pits.

KORS has been a strong technical performer in 2016, finding recent support above both its 50- and 200-day moving averages. Up 0.3% to trade at $50.40, the stock has added 25.8% on a year-to-date basis. And peak open interest on the stock currently resides at the August 45 put -- with 12,718 contracts in residence, more than twice as many as the next most popular position -- suggesting the underfoot $45 level could serve as support, even in the case of an earnings pullback.

Despite the stock's impressive technical setup, analysts have taken a lukewarm view. Of the 15 brokerage firms providing coverage, only four recommend buying the stock, while the remaining 11 sit on tepid "hold" ratings. Short interest on the stock is also elevated, representing more than 13% of KORS' available float. At the equity's typical daily pace of trading, it would take nearly nine sessions to buy back all the shorted shares.

In the options pits, meanwhile, put buying has been a popular strategy in recent months. In fact, KORS' 50-day put/call volume ratio on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) sits higher than 72% of the past year's readings, at 0.79.Moreover, the stock's Schaeffer's put/call open interest ratio (SOIR) comes in at a top-heavy 1.23, just 4 percentage points shy of a 52-week peak.

Today, options traders are again taking a put-skewed approach. At last check, KORS puts are trading hands at four times the expected intraday rate, more than doubling calls. In fact, put volume is running in the 98th percentile of its annual range, with put open interest already seated in the 89th annual percentile. The weekly 8/12 series is popular, accounting for eight of the 10 most active strikes. The top spot belongs to the 46-strike put, where it looks like traders may be purchasing new positions.

Buyers of KORS near-term options are paying a hefty price for their bets today, too. The stock's 30-day at-the-money implied volatility sits higher than 90% of the past year's readings, at 53%, while its Schaeffer's Volatility Index (SVI) of 81% represents a 12-month high. Together, these readings suggest that premium on the stock's near-term options is pricing in historically high volatility expectations at the moment.

Turning back to earnings, if Michael Kors Holdings Ltd (NYSE:KORS) can repeat history, bearish options traders could soon be hurting. KORS has swung to the upside in the session following its earnings reports the past four quarters in a row. At present, options are pricing in a 16.2% one-day post-earnings move for the stock -- wider than the average swing of 11.3% over the last eight quarters. With so much pessimism built up already, a positive earnings reaction could result in a major boost for the shares, as analysts raise their opinions and bearish traders abandon their losing positions.

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