2 Fashionably Smart Ways to Play the KORS Stock Dip

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Worse than a combination of plaid and polka dots, an awful-looking earnings report from Michael Kors Holdings Ltd (NYSE:KORS) sent KORS stock plummeting lower Wednesday.

2 Fashionably Smart Ways to Play the KORS Stock DipBut for investors with a contrarian eye, the severe technical action sets the stage for trying on an attractive and protected bullish vertical spread, suited to one’s liking.

If there was a reality television show called Project Runaway, KORS stock would be the headliner after shares hemorrhaged 24% Wednesday. The once-hot IPO and unisex fashion brand had been all the rage with investors not so long ago, but now looks like a victim of its own success.

Wednesday’s earnings report, in a nutshell or more aptly, a handbag, was nothing short of heinous-looking; well at least to bulls in KORS. Profits missed Street views by a penny and revenues came in just shy of estimates with 18% year-over-year growth. More alarming, same-store sales produced a first-ever dip of 1.7% compared to the year ago period’s increase of 26%.

Assisting in the sharp KORS discount, management at Michael Kors slashed its earnings and revenue outlook well below consensus estimates. Finally and not helping matters, gross margins fell below forecasts.

The slip in margins was spurred along by heavy discounting of the now mainstream MK brand. My guess is that 2 cents isn’t going to ease the $14.66 of pain inflicted on KORS shareholders.

KORS Daily Chart

2 Fashionably Smart Contrarian Plays in KORS Stock
Source: Charts by TradingView

Not so long ago, KORS stock made its public debut during the winter collection of 2011. The hot IPO continued to be well-worn and shown off in portfolios through the first quarter of 2014. In fact, during that initial and glamorous, go-go growth period, KORS soared from a low near $23.50 to more than $100.

In the here and now and with bulls less than half-dressed at $45.93; shares of KORS are officially out of style with Wall Street. For contrarians, the upside of this is the extreme pessimism priced into KORS stock.

As the provided daily chart of KORS shows; the technical picture does look like a classic capitulation reaction based on the size of the move and record volume.

2 Trades for KORS Stock

For investors interested in a bullish contrarian position in KORS, verticals are the way to go. Ultimately, verticals are limited risk spreads, which reduce your dollar and volatility exposure and on an expiration basis are quicker to realize profits than a simple purchase of an options contract.

If you feel the extreme move in KORS has potential for a quick counter-trend move, some variation of a bull call spread is most appropriate as you’ll get more bang for your buck. Checking the board, the Jun $45/$47.5 for $1.10 mid-market is priced well.

With KORS stock at $45.93, the June call spread intrinsically fetches 93 cents at expiration and would amount to just a very slight loss of 17 cents, barring commissions and slippage. And if the expectation of KORS being an overreaction proves correct, a move higher of just 3.4% results in a gain of $1.40, or a $136% return.

On the flip side, if an investor is simply more confident KORS shares are unlikely to move much lower, an out-of-money bull put spread makes intrinsically more sense. Ironically enough, this type spread takes advantage of pure extrinsic or time value positioned to decay towards zero into expiration.

The Jun $45/$42.50 for a mid-market credit of 75 cents is one vertical that positions for this type of discussed outcome in KORS stock. With shares roughly 2% from the sold strike, the trader is able to keep the credit, if at expiration, shares simply remain at or above $45.

Additionally, the 75-cent credit amounts to having an additional 1.67% of breathing room in KORS stock before the breakeven of $44.25 is reached.

And should KORS shares manage to move aggressively lower, the maximum risk remains $1.75. That could be viewed as a limited risk way to enter shares at much lower levels through the assignment process, if investors decide to drop the KORS handbag again.

Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon his observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT

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The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.


Article printed from InvestorPlace Media, https://investorplace.com/2015/05/2-fashionably-smart-ways-to-play-the-kors-stock-dip/.

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