For about a decade, brick-and-mortar retail industry was uprooted by the effects of the Amazon.com, Inc (NASDAQ:AMZN). Wall Street has reacted in kind, and their stocks have also been decimated. Finally in 2017 investors started to rebuild confidence that companies like Kohl’s Corporation (NYSE:KSS) have adapted to the new normal and are now ready to recover.
KSS reported earnings this morning, and it supports that notion. They beat on all metrics and most importantly, raised guidance. This is saying a lot, since we have had a difficult first quarter with headlines of spiraling rates and looming tariff wars. The management’s assertion of better things to come is the green light some traders need.
KSS stock rallied 5% early but now is heavily negative. This is inside a stock market relief rally on easing economic tensions between the U.S. and China. The S&P is amidst a technical breakout that could retest the 2,800 levels and that would lift most stocks, including this one. And therein lies my opportunity. KSS will find footing and perhaps retest the highs.
Kohl’s stock has favorable technical patterns that should retest $72 per share. The stock has been setting lower highs and higher lows, pinching the range tight. This morning’s reversal may kill that prospect but I am willing to try. Market-wide momentum should carry it through next leg higher.
Fundamentally, KSS is not bloated, so owning shares at a discount from current price is not likely to be a major financial mistake.
Click to EnlargeTo go long KSS stock today I could risk $61 per share to buy the stock but my money would be at risk with no room for error. So instead, I use options where I can go long with a giant moat around my risk.
This is a pair trade. The first would is set to capture the upside potential. The second is the bank for the first. So if support holds, I would be long KSS for no money out of pocket.
KSS Stock Trade Idea
The Upside Potential Bet: Buy the KSS July $65/$67.50 debit call spread for 70 cents. This is a chance for me to triple my money if the stock rallies through my spread by July.
To eliminate my out-of-pocket risk, I sell downside risk into support.
The Bank: Sell the KSS Oct $50 put This is a bullish trade for which I collect $1.50 to open. If the stock falls below my puts then I own shares and accrue losses below $48.50.
The net results of both trades is a net credit. So as long as price stays above my support, the premium I recover from selling the calls is incremental profit.
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Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.