Nordstrom, Kohl's Shares Inspire Little Confidence Ahead of Earnings

Options traders have taken diverse approaches to retailers Nordstrom, Inc. (JWN) and Kohl's Corporation (KSS)

Feb 22, 2017 at 10:21 AM
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Retail stocks are in the spotlight this week, dominating the earnings calendar. Among the names still due to report are department stores Nordstrom, Inc. (NYSE:JWN) and Kohl's Corporation (NYSE:KSS), which will both unveil quarterly results on Thursday. Below, we'll take a look at how JWN and KSS shares have been performing of late, and how options traders have been aligning ahead of earnings.

Nordstrom Short Sellers Hedging With Call Options?

JWN will head to earnings confessional after tomorrow's close, and traders and analysts largely appear to be expecting a downside move afterward. For starters, 13 out of 18 brokerages rate the shares a "hold" or worse. Plus, short interest has been on the rise in recent weeks, currently representing more than 22% of JWN's available float. At the stock's average daily volume, it would take almost two full weeks to cover these pessimistic positions.

In the options pits, call buying has been unusually popular of late. JWN's 50-day call/put volume ratio of 2.75 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) ranks higher than 87% of the past year's readings. But, considering the elevated level of short interest, it's possible some short sellers have been buying calls as a hedge for their bearish stock positions.

Nordstrom, Inc.'s (NYSE:JWN) earnings history gives little reason for traders to expect a sudden slide, however. Over the past eight quarters, the stock has moved higher in the session after earnings five times, averaging a 7.4% swing in either direction. Options traders seem to be eyeing a more dramatic reaction this time, with the market pricing in an 11.1% swing for Friday. Technically speaking, JWN could certainly stand to see some gains, as the shares are down 11% year-over-year, at $45.22.

Options Traders Near Bearish Extreme on Kohl's

Reporting earnings before the market opens tomorrow, KSS has been the target of much pessimism lately, too. Three-fourths of tracking analysts give the stock a rating of "hold" or "strong sell." And short interest represents 11.9% of the equity's total float -- or a week's worth of trading, at KSS' typical daily pace -- even after falling by more than 21% during the two most recent reporting periods.

But, unlike its retail peer above, KSS hasn't seen elevated short interest translate into call buying. In fact, the stock's 10-day put/call volume ratio on the ISE, CBOE, and PHLX ranks just 4 percentage points from an annual peak, at 3.60. Simply stated, speculators have purchased KSS puts at nearly four times the rate of calls during the last two weeks.

From a technical standpoint, all this pessimism may well be warranted. KSS shares dove sharply at the beginning of the year, after the company cut its guidance on weak holiday sales. More recently, the stock has been running into trouble at its declining 40-day moving average, and at $41.45, the shares have shed 30.5% from their early December annual high. That said, Kohl's Corporation (NYSE:KSS) has moved higher in the post-earnings session in five of the last eight quarters, with an average one-day swing of 8.6% either way. The options market is currently pricing in a slightly wider 10.4% move for the shares tomorrow.

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