The Suspiciously Well-Timed Options Bet on Kate Spade & Co (KATE)

Kate Spade & Co (KATE) could be putting itself on the sale block

Dec 29, 2016 at 9:23 AM
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Kate Spade & Co (NYSE:KATE) blew up yesterday on rumors the fashion brand is exploring a potential sale. Specifically, the stock jumped 23% to close at $17.86, its loftiest settlement since mid-November. Looking at the options activity surrounding the M&A buzz, it's clear that the pop left at least one trader sitting very pretty.

Taking a quick step back, KATE call options traded at nine times the average daily rate yesterday. In fact, the 32,241 contracts on the tape put volume in the 99th percentile of its annual range.

As mentioned earlier, one transaction was especially curious, resulting in a fair share of national media attention. Specifically, just minutes before the sale rumors surfaced, one trader bought to open a block of 1,993 January 2017 16-strike calls for $0.40 apiece. Following the news, the ask on those calls had jumped north of $2, meaning the speculator had more than quadrupled his initial cash layout. So far, the Securities and Exchange Commission (SEC) has not commented on whether it will investigate the serendipitously timed trade.

Plenty of call buyers should be able to capitalize on yesterday's bull gap, though. In the last 10 days, traders have bought to open 8.49 calls for every put, suggesting there were already plenty of bulls in KATE's options pits heading into Wednesday's session.

A number of short sellers apparently dodged a bullet, as well. In the last two reporting periods, short interest on KATE plunged 38%, leaving less than 3% of the stock's float dedicated to short interest.

Technically speaking, despite yesterday's gap higher, the shares remain a long-term underperformer. Since touching an annual high of $26.46 in late April, Kate Spade & Co (NYSE:KATE) has shed nearly one-third of its value. Not to mention, last week, the stock hit a three-year low of $14.02.

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