Morgan Stanley, Options Traders Bearish Toward Coach

Retail stock Coach Inc (COH) is shrugging off Morgan Stanley's "sell" recommendation, thanks to sector tailwinds

Dec 28, 2016 at 2:54 PM
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Accessories designer Coach Inc (NYSE:COH) is rallying on news that sector peer Kate Spade & Co (NYSE:KATE) is exploring a sale. At last check, COH stock was up 1.8% at $35.08. At the same time, however, pessimism is growing among options traders and analysts alike, with Morgan Stanley waxing pessimistic on the underperforming shares. Specifically, the brokerage firm dubbed Coach one of its stocks to sell in 2017.

Taking a step back, COH shares have struggled of late, with brick-and-mortar retailers in general grappling with the shift toward online shopping, as well as concerns over potential import taxes under the incoming Trump administration. As a result, the stock fell short of this bullish Thanksgiving week trend. Longer term, since turning over from their late-July highs, the shares have surrendered nearly one-fifth of their value. As such, Coach joins a number of retail names at or near oversold territory, as the equity settled Tuesday with a 14-day Relative Strength Index (RSI) of 33.

As alluded to, Wall Street hasn't been impressed with the stock. COH has racked up a 10-day put/call volume ratio of 2.05 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Not only does this ratio indicate long puts have doubled calls, it also ranks in the bearishly skewed 78th percentile of its 12-month range.

Echoing this, the stock sports a Schaeffer's put/call open interest ratio (SOIR) of 1.17, with put open interest outweighing call open interest among options in the front three-months' series. On top of that, this SOIR registers in the put-skewed 89th annual percentile. In terms of open interest, the largest accumulation by far resides at the deep out-of-the-money January 2017 25-strike put, with more than 9,000 contracts in residence.

Within the front-month series, options premium is relatively cheap right now. Specifically, COH's Schaeffer's Volatility Index (SVI) checks in at 25%, below 87% of all readings recorded in the past year. In other words, now is a great time to purchase short-term options on the stock, as muted volatility expectations are being priced in.

Outside of options land, sentiment is a more mixed picture. Despite Morgan Stanley's harsh note, the fact remains that two-thirds of analysts strongly recommend buying Coach Inc (NYSE:COH) shares. Meanwhile, short interest dropped by about 20% during the last two reporting periods, but at the stock's average trading rate, it would still take nearly four sessions to cover the remaining shares sold short.

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