COH – Coach, Inc. – Concern that growth may be slowing in China sparked selling pressure in shares of luxury goods retailers such as Coach, Inc. this week. Shares in the largest U.S. luxury leather goods seller fell 0.90% to $53.51 on Friday afternoon, adding to Thursday’s losses of roughly 6.0%. A three-legged options trade initiated on the stock this morning suggests one strategist expects shares to continue to decline in the next couple of months. The trader may be assuming an outright bearish or protective stance on Coach ahead of the company’s first-quarter earnings report on October 25.
The investor appears to have sold 1,100 calls at the Nov. $57.5 strike for a premium of $2.50 each, in order to offset the cost of buying the 1,100-lot bearish Nov. $43/$50 put spread purchased at a net premium of $2.20 per contract. The trader pockets a net credit of $0.30 per contract on the transaction, which he keeps in full as long as shares in Coach fail to rally above $57.50 at expiration. Additional profits are available to the investor should COH’s shares fall 6.6% from the current price of $53.51 to breach $50.00. Maximum potential profits of $7.30 per contract, including the net credit of $0.30, pad the investor’s hand-stitched fine Italian leather wallet if the stock drops 19.6% to settle beneath $43.00 a share at November expiration.
The bear put spread normally limits an investor’s maximum loss potential to the net premium paid, however, the addition of the short calls introduces additional risk to the position. If the investor holds no position in the underlying, and is naked short the calls, he faces uncapped losses to the upside in step with any rally in the stock that boosts shares above the effective upper breakeven price of $57.80 ($57.5 strike plus $0.30 net credit) through expiration day. Alternatively, the spread may represent downside protection for an investor long the stock. In this scenario, the put spread shields the investor from a nearly 20% drop in the value of COH shares, while leaving some rebound-room for the stock up to the point at which he may have shares called away at $57.50 each, or considerably $57.80 a share if you tack on the $0.30 net credit received. Options implied volatility on Coach, Inc. rose 2.570% to 60.671% in early-afternoon trade.
BIG – Big Lots, Inc. – Bursts of activity in Big Lots call options this morning may be the work of investors positioning for the broadline closeout retailer to perform well in an economic climate that could see many consumers trading down to the discounters. Shares in Big Lots are certainly out-performing today, with the stock rallying as much as 3.2% earlier in the session to $35.65. Fresh prints in the Nov. $40 and Jan. 2012 $40 strike calls appear to have been initiated largely by buyers. The nearer-term calls changed hands upwards of 2,300 times against previously existing open interest of just 20 contracts. Time and sales data suggests nearly all of the contracts were purchased at a premium of $0.35 apiece. Buyers of the call options make money at expiration as long as BIG’s shares surge 13.2% over today’s high of $35.65 to surpass the effective breakeven price of $40.35. But, these contracts could get expensive very quickly if like-minded BIG-bulls continue to buy into the retailer and lift the stock price. Increases in implied volatility will also lift the premium on the options, and may provide an attractive selling point for call buyers in advance of expiration even if the stock fails to rally all the way up to $40.00. Meanwhile, nearly 3,000 call options changed hands at the Jan. 2012 $40 strike against 491 open positions. More than 1,800 of these contracts appear to have been purchased for an average premium of $1.09 each. Traders long the calls profit if shares exceed $41.09 at expiration day next year. Shares in Big Lots last traded above $41.09 in May.
MOLX – Molex, Inc. – The purchase of a sizeable block of put options on the manufacturer of electronic components may be the work of an investor bracing for continued bearish movement in the price of the underlying stock through the company’s first-quarter earnings report on October 25. More than 3,500 puts changed hands on Molex so far today, which is roughly comparable in terms of volume to the 3,516 contracts comprising overall open interest on the stock. Shares in Molex, Inc. fell 2.95% to $21.06 this afternoon. It looks like the trader responsible for just about all of the activity in MOLX options today purchased 3,500 in-the-money puts at the Nov. $22.5 strike for an average premium of $2.39 apiece. The put buyer profits if shares in Molex fall 4.5% to breach the effective breakeven point on the downside at $20.11 at expiration. Options implied volatility on the stock is running 7.9% higher on the day at 53.28% as of 1:05 pm in New York.