Option Traders Take Sides on Coach Inc (COH), Michael Kors Holdings Ltd (KORS)

Near-term option traders have starkly different opinions of luxury retail stocks Coach Inc (NYSE:COH) and Michael Kors Holdings Ltd (NYSE:KORS)

Jan 17, 2017 at 1:18 PM
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Luxury retailers are in the spotlight today, after Tiffany & Co. (NYSE:TIF) announced disappointing holiday sales. However, sector peers Coach Inc (NYSE:COH) and Michael Kors Holdings Ltd (NYSE:KORS) seem to be fazed by neither TIF's lackluster data nor some bearish analyst attention, with both stocks notably higher. What's more, while COH and KORS have both underperformed the broader equities market in recent weeks, near-term option traders and analysts have starkly different opinions on the two stocks.

First up, COH is trading 2.8% higher at $36.07 so far today, in spite of a price-target cut to $31 from $32 by Goldman Sachs. But while the stock is set to overtake its 10- and 20-day moving averages for the first time since early December, it's still down 17% since its July peak, with recent rally attempts blocked by its 200-day moving average.  

COH options are crossing the line at twice their average daily volume, with puts outnumbering calls 2,641 to 1,902. Specifically, COH's most active option is its February 34 put, which has seen possible sell-to-open action. If speculators are writing the puts to open, they're expecting COH to remain atop the $34 level through the close on Friday, Feb. 17, when the options expire -- which encompasses Coach's expected earnings release at the end of the month. COH hasn't traded below $34 since February 2016.

Widening the scope, today's preference for near-term puts isn't out of the ordinary. COH's Schaeffer's put/call open interest ratio (SOIR) of 1.30 is higher than 97% of all other readings from the past year, indicating near-term option players have rarely been more put-biased. In addition, COH's front-month gamma-weighed SOIR of 2.19 indicates put open interest more than doubles call open interest among near-the-money, front-month options, set to expire this Friday. Despite this put skew, the most added option during the past two weeks of trading is the weekly 2/10 36-strike call, the buyers of which are betting on near-term upside -- or perhaps a post-earnings win -- for the retail stock.

Taking a step back, analysts remain in Coach Inc's (NYSE:COH) bullish corner, despite the stock's struggles of late. Fourteen of 21 brokerage firms weighing in rate the shares a "strong buy," with only one "sell" or worse recommendation to be seen.

Elsewhere, KORS is trading 3.8% higher at $43.98. Like COH, the retailer is blowing off a price-target cut to $51 from $52 by Goldman Sachs, with the shares on pace to close above their 10- and 20-day moving averages for the first time since early December. Still, the security has shed more than 16.5% since its early November peak, breaking south of support in the $46 area.

Drilling down, KORS' SOIR of 0.46 sits at an annual low, indicating near-term option players haven't been more call-skewed at any other point in the last 12 months. Widening the lens, KORS 50-day call/put volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows 7.70 calls bought to open for every put over the last 10 weeks, a reading that sits just 6 percentage points from an annual peak. Perhaps buyers are betting on an earnings win for KORS in the near term.

Unlike COH, KORS isn't beloved among analysts, with just two of 18 offering up a "buy" or better endorsement. However, not everyone is in Michael Kors Holdings Ltd's (NYSE:KORS) corner. Short interest is up 7% over the last two reporting periods, and now accounts for 8.5% of the stock's float. It would take traders 6.4 days to cover these positions, given KORS' average daily volume. Against this backdrop, perhaps some of the recent call buyers -- particularly at out-of-the-money strikes -- are shorts seeking an options hedge against an earnings win for KORS.

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