Options Bulls Hold Out Hope for Kate Spade & Co (KATE)

Calls have been the options of choice on Kate Spade & Co (NYSE:KATE), even as the retail stock pans three-year-low territory

Dec 22, 2016 at 3:21 PM
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Kate Spade & Co (KATE) is trading lower along with its fellow retail stocks, with shares of the handbag maker down 3.5% at $14.09 -- and fresh off a three-year low of $14.02. While a negative earnings reaction for retailer Bed Bath & Beyond Inc. (NASDAQ:BBBY) and BlueFin Research's expectations of a fiscal third-quarter earnings miss for Michael Kors Holdings Ltd (NYSE:KORS) are likely weighing on KATE stock today, options traders are nonetheless keeping the faith. In fact, amid a low-volume session in KATE's options pits, calls are outpacing puts by a more than 10-to-1 margin.

Most active is the February 16 call, where it looks like options traders may be purchasing new positions. If this is the case, the goal is for KATE stock to surge back above $16 by the close on Friday, Feb. 17 -- when the back-month options expire. Should the calls finish out of the money, though, the most the call buyers stand to lose is the initial premium paid.

Today's call-skewed session is nothing new for KATE, though. The stock has seen some of the most active options trading among mid-cap names over the past 10 sessions, according to Schaeffer's Senior Quantitative Analyst Rocky White. Specifically, 27,746 calls have traded on KATE over the last two weeks, compared to 3,416 puts.

Widening the scope reveals a prevalence of call buying relative to put buying at the major options exchanges in recent months. In fact, KATE sports a top-heavy 50-day call/put volume ratio of 9.74 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). What's more, this ratio ranks in the elevated 73rd annual percentile, meaning long calls have been initiated over puts at a faster-than-usual clip.

Outside of the options pits, short interest is almost non-existent on KATE, having dropped 52.6% in the two most recent reporting periods -- as bearish bettors likely took profits on the plunging stock. Now, the 3.6 million KATE shares that are sold short is the fewest the stock has seen since May 2009. Analysts, meanwhile, have taken a glass-half-full stance toward the retail stock, with 71% maintaining a "buy" or better rating, and not a single "sell" to be found.

From a contrarian perspective, Kate Spade & Co (KATE) could be at risk of additional losses in the near term. Should the shares continue to add to their nearly 21% year-to-deficit, an unwinding of optimism among options traders, a renewed burst of selling pressure from short sellers, and/or a round of downgrades from the brokerage bunch could send KATE stock on its next leg lower.

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