A post-earnings pop plus overdue bull notes fueled the winning trade
On Monday, we profiled one of our best options trades of 2020, a summer bet on a red-hot software stock. In part two of our three-part mini-series highlighting our best 2020 Schaeffer's trades, we're going to conduct a postmortem on a retail stock that ruled the fall.
Subscribers to Schaeffer's Options Under $5 service scored a 453.4% profit with the Capri Holdings Ltd (NYSE:CPRI) January 2021 15-strike call we recommended. We'll take a closer look at why CPRI appeared on our bullish radar, and how the winning options trade unfolded.
We recommended the CPRI trade on Sept. 4. At that time, per the preliminary chart below, the Michael Kors parent had broken out of a technical downtrend, just as back-to-school and holiday shopping seasons neared. Breaks from such a trendline (yellow line) often resulted in carving out a channel of higher highs with that break as the base.
Capri stock was ripe for a shift in analyst attention too, with 13 of the 17 brokerages in coverage maintaining tepid "hold" ratings at the time. That wasn't the only bearish sentiment ready to unwind; a healthy 9% of the shares' total available float was sold short, so an exodus of short sellers could keep the wind at CPRI's back.
In the options pits, more puts were bought to open in the last 50 days than at any time over the past year. This is per data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), which shows CPRI's 50-day put/call volume ranking in the 100th percentile of its annual range.
Plus, short-term speculators were more put-heavy than usual, per the equity's top-heavy Schaeffer's put/call ratio (SOIR) of 1.88, in the 93rd annual percentile. An unwinding of the hedges related to these near-term bets could translate into options-related support for a stock.
Echoing this, the security's front-month gamma-weighted Schaeffer's put/call open interest ratio (SOIR) sat at an elevated and historically significant 2.36, meaning near-the-money puts outweighed calls among options expiring in the standard October series.
Lastly, CPRI's Schaeffer's Volatility Scorecard (SVS) stood at a solid 80 out of 100. In other words, the equity has exceeded option traders' volatility expectations during the past year -- a boon for options buyers.
After our call recommendation, Capri stock climbed higher, bouncing from that downtrend. Two months later, a post-earnings bull gap prompted a flurry of price-target hikes. We closed half our position on Wednesday, Dec. 2, when CPRI was trading around $37. We closed the final half of the position a week later on Dec. 9, with the stock around $39, allowing our subscribers to lock in a 453.4% profit in roughly three months.
