Stock Options To The Rescue! Michael Kors (KORS)
Today we’re looking at an option trade on Michael Kors to reduce your cost basis and profit from the recent decline in the stock.
Here’s what happened…
Michael Kors (KORS) shares are down 9% from $42.50 to $38.74 after quarterly revenue, earnings, and outlook beat Wall Street estimates.
Here’s the deal…
The luxury clothing and accessory retailer had a spectacular quarter.
Earnings per share doubled from 11 cents last year to 22 cents. They easily topped the consensus estimates of 16 cents per share.
Revenue grew 58.3% from $240 million to $380 million. And retail net sales increased more than 80%. The strong results were driven by 71 new store openings and same-store sales growth of 36.1%.
Additionally, management issued optimistic guidance for fiscal 2013. They’re expecting revenue of $1.7 to $1.8 billion and EPS to fall in a range between $1.08 and $1.12.
Here’s the kicker…
Luxury retail is booming.
We’re seeing similar trends among other luxury and lifestyle brands from Tiffany (TIF) to Starbucks (SBUX). Clearly, consumers who are making money aren’t afraid to spend it.
And right now Michael Kors is one of the hottest names in luxury.
Unfortunately, the stock is down nearly 9% from $42.50 to $38.74 after reporting blowout earnings.
Why?
KORS recent initial public offering is to blame. Insiders who own about 52% of shares outstanding can’t sell their stock until the lock-up period ends on June 20th.
Investors are afraid insider selling after the lock-up expires will flood the market and send shares of KORS plummeting.
Here’s what to do now…
Let’s assume you invested $4,250 to buy 100 shares of KORS at $42.50 after earnings. At a current price of $38.74 per share, you’re down about 9% or $376.
Obviously, this wasn’t the result you had hoped for after KORS reported a fantastic quarter. Let’s look at how an option trade can help you rescue this trade.
Selling the KORS July $40 covered call can help you get this trade moving in your favor.
Right now, the option premiums on KORS are rich.
You can sell the July $40 out-of-the-money call option with only 37 days until expiration for $2.60. So you collect $260 with a very short time until expiration.
Selling the call option immediately recoups $260 of your $376 loss.
There are two possible outcomes for this trade…
First, if KORS is above the $40 strike price, the option holder will exercise their right to buy your stock at $40 per share. So your 100 shares will be called away or sold for $4,000.
But that’s just fine… you bought the stock for $4,250. So you’re realizing a small $250 loss on the sale of the stock. But you also keep the $260 in option premium. So you’re essentially out of the trade at breakeven.
A more likely scenario is KORS never reaches $40.
As I pointed out earlier, insiders can begin selling stock on June 20th. And they own more than half the shares outstanding. There’s sure to be some insider selling keeping the stock price depressed over the next few months.
If KORS stays below $40 until July 20th, the option will expire worthless. You’ll get to keep the $260 in option premium. In essence, the option premium lowers your cost basis from $42.50 to $39.90 per share.
And the best part is you still own the stock. Once the initial wave of insider selling subsides, you’ll be in a much better position to profit from the lower cost basis.
In my opinion, selling a covered call against your KORS stock holdings is much better than selling or doing nothing. This strategy reduces your costs basis and puts you on the fast track to turning this losing trade into a winner.
Good Investing,
Corey Williams
Category: Stock Options To The Rescue!
