Option Trader Bets Big on Coach (COH)
08/12/2011 7:00 am EST
Clearly counting on slow spending in the luxury retail sector, one option trader has structured a bear put spread on Coach, Inc. (COH), which will profit if shares continue to fall into early 2012.
Retailer Coach, Inc. (COH) has garnered a couple of mentions in the Wall Street Journal recently. Earlier this week, the financial publication noted that "well-heeled shoppers splurge when their portfolios are riding high and scrimp when they fall," which is obviously bad news for luxury retailers.
Furthermore, the WSJ noted COH's double-digit percentage decline since the end of July, which has surpassed even the broader S&P 500 Index (SPX) and highlighted the negative implications of slower spending by the wealthy heading into the crucial holiday season.
The column could've been the motivation for a skeptically skewed options trade on Wednesday (August 10), with one speculator constructing a long-term bear put spread. Specifically, the investor bought nearly 1,000 January 2012 50-strike puts for the ask price of $5.28 apiece, and simultaneously sold an equal amount of deeper-out-of-the-money January 2012 40-strike puts for the bid price of $1.96 each. As such, the spread was established for a net debit of $3.32 per pair of puts, which represents the maximum risk on the play.
The objective is for the shares of COH to retreat beneath the $46.68 level (bought put strike minus net debit) before January options expiration. However, while the sale of the 40-strike puts trimmed the trader's maximum risk and breakeven rail, it also caps their maximum reward at $6.68 per pair of puts (difference between strikes minus net debit) no matter how far COH should sink south of the $40 level within the puts' lifetime.
More recently, the Wall Street Journal last night took a closer look at COH, with a focus on the company's attempt to lure in more male customers. CEO Lew Frankfort projected men's business to increase by at least 25% over the next several years, thanks to plans to open men's-only stores and the recent launch of its new men's collection. Already, the company's men's business doubled in sales to more than $200 million in the fiscal year ended July 2, the WSJ reported.
Here’s a daily chart:
Despite the more upbeat column, though, shares of COH have been battered (like all equities) this week. However, short term, the candles seem to be heading upward and may try to test the 200-day moving average, which sits around $56.70.
By Andrea Kramer, contributor, Schaeffer’s Trading Floor Blog