Michael Kors Holdings Ltd (KORS) was detained by the fashion police Wednesday on circumstantial evidence. In the process, contrarian investors have an attractive opportunity to outfit themselves with a limited risk bull put spread in KORS stock.
Investors are blaming it on the dismal report from Fossil Group Inc (FOSL), sending KORS stock down by roughly 12% Wednesday.
In fact, Michael Kors does have legacy licensing agreements and a connected accessories collaboration with Fossil, so there is some connectedness between the two outfits, pardon the pun.
Alternatively, investors can point the finger for Kors’ dizzying gap lower at retailer Macy’s, Inc. (M) following its awful earnings announcement. Contrarian bulls, however, can embrace both catalysts as an opportunity to profit from this overreaction.
While both Macy’s and Fossil have ties (pardon the pun again) to Michael Kors, neither company has a strong historical correlation of foreshadowing problems with KORS stock.
As KORS is flung back into the bargain bin — despite posting better-than-expected results back in February — now is the time to shop for a very affordable position in this fashion retailer.
KORS Stock Daily Chart
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There’s little doubt about the bargain-hunting possibilities in KORS as fear grips investors.
Wednesday’s decline in KORS stock has allowed shares to retrace 62% of their move from its February multiyear low to March’s triumphant, relative strength and market-leading highs.
And while catching the proverbial knife never feels comfortable at the time, we do see this as a bullish opportunity for bargain hunters, as shares of KORS trade below February’s bullish earnings-related bid.
Of course, KORS could sink even lower in the right kind of “risk-off” environment. At the end of the day, other than shares of KORS marked down to zero, there are no certainties — well, other than those offered in the options market.
KORS Stock Bull Put Spread Strategy
Given what’s been stated and in reviewing the options market, the June $40/$37.50 bull put spread for 65 cents is attractive.
With shares of KORS at $44, this bullish vertical is able to collect the full credit and yields 35% at expiration if shares aren’t below $40 or an additional 9% from current levels.
As the healthy credit on this KORS spread is possible in the face of a full-fledged gap fill from the prior bullish earnings report, the return on investment is even more enticing in our opinion.
Lastly, with earnings later this month, the vertical reduces other Greek risks and keeps potential losses contained to a guaranteed amount. And in our book, that’s always a bargain to consider when positioning in KORS stock.
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 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.
