MomentumOptionsTrading.com Midday Update for 5/28/14
Michael Kors (KORS) Tops Estimates (Again)
Although 1Q earnings season is officially over, there are a number of high-profile companies reporting their numbers that are on a different fiscal year but worth watching over the next few weeks.
Michael Kors (KORS, $96.38, up $0.64) reported their 4Q numbers ahead of this morning’s open and has made explosive moves since becoming a publicly traded company.
The company has been a Wall Street darling for 3+ years after opening at $25 in December 2011 (price adjusted for stock splits) and trading near all-times.
The options on KORS trade for a premium and going long ahead of their earnings has been a popular trade. However, despite a the beat, shares fell to a low of $91.80 on concerns their margins have peaked.
Michael Kors reported a profit of $0.78 a share on revenue of $917.5 million. Analysts were expecting $0.68 a share on sales of $815 million.
The June 100 calls (KORS140621C00100000, $1.10, down $1.55) closed at $2.65 ahead of Tuesday’s close while the June 90 puts (KORS140621P00090000, $1.08, down $1.05) closed at $2.13 but had a wide bid/ask of $2.05-$2.30 going into the close.
These options as a strangle trade would have cost nearly $5 and shares needed to clear $105 or fall below $85, technically, for the position to break even. As you can see, both options were cut in half after shares failed to make the move traders were expecting.
Knowing when an option price is inflated and the break even points of a trade are crucial. Although I had no intentions in a directional trade for KORS, I wanted to point this out because these types of setups exploit rookie option traders.
Another strategy would have been to sell both options and cover today but this would have created a “naked” position with more risk.
Earnings trades are fun but it is crucial not to overpay on the options.
As far as the market, the bulls are taking a breather as the indexes are slightly lower.
The Dow is down 25 points to 16,650 and the S&P 500 is off a point to 1,910. The Nasdaq is declining 7 points to 4,230 while the Russell 2000 is lower by 5 points to 1,137.
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