Investors are playing whack-a-mole with retailers this summer. Except the mallet their wielding isn’t covered in the soft stuff. It’s studded with spikes designed to kill. Just ask Dicks Sporting Goods Inc (NYSE:DKS) or Foot Locker, Inc. (NYSE:FL). Indeed the pile of Amazon.com, Inc. (NASDAQ:AMZN) victims continues to grow ever higher. Even Michael Kors Holdings Ltd (NYSE:KORS), a recent earnings winner, is getting caught up in the beat-down. KORS stock is off by more than 3% today, but I suspect opportunity lurks amid the pullback.
Earlier this month, Micheal Kors soared on better-than-expected earnings. The profit-laced surprised delivered an overnight gain of 18%, launching the stock into orbit. KORS tagged a new high for the year at $46.26 during the follow-through.
The gap healed all of the damage inflicted during this year’s drubbing in one fell swoop. KORS now finds itself well above all major moving averages.
The past week, however, has seen a modest bout of profit-taking. But can you really blame sellers here? Shareholders have been locked in the house of pain all year long and the earnings surprise was the very first chance they’ve had to escape. And many are bolting.
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Today’s downdraft is significant because we broke the low of the earnings reaction candle. These unfilled gaps often become support, but not this time. With the floor now broken and a price void looming beneath, it’s no wonder we’re seeing some swift follow-through selling in KORS stock today. It will be interesting to see if buyers materialize on a test of the rising 20-day moving average.
Given the magnitude of the early-August jump, I’m betting KORS doesn’t completely fill its earnings gap. Even with the whole retail sector sitting in the dog house.
If you’re willing to wager this dip gets bought, I have a trade idea worth considering.
The Trade on KORS Stock
To provide a wide margin of error, selling puts is the way to go. Particularly with a stock as cheap as Michael Kors. And it just so happens that we have a strike price available that sits right at the gap fill area: $37.50.
Sell the Sep $37.50 put for 35 cents or better. At the time of this writing, the stock is sitting at the low of the day, so I suggest waiting for signs that it is rebounding before pulling the trigger.
The max reward is limited to the initial 35 cents. To minimize the loss, you could exit if we fall to the strike price.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities. Want to learn how to master the art of option selling for high-probability cash flow? Check out Tyler’s recently released video series through Tackle Trading on how to systematically sell iron condors for monthly income.
