Retail stocks are spiraling today, on reports major department stores have ordered less inventory for the holiday season. Even as rumors swirl over a possible Amazon takeover (subscription required), shares of Kohl's Corporation (NYSE:KSS) are down 4.8% to trade at $40.56. Nevertheless, one options trader seems confident KSS will bounce back by week's end -- a time frame that includes the retailer's Thursday morning earnings report.
Taking a quick step back, roughly 6,400 calls and 2,300 puts have traded on KSS so far today -- more than two times what's typically seen at this point in the trading session, and total options volume is pacing in the 91st annual percentile.
The stock's weekly 11/10 41.50- and 45-strike calls are most active, due to what appears to be the initiation of a call ratio spread. Specifically, one trader sold to open 2,500 45-strike calls for $0.30 apiece to fund the purchase of 1,250 41,50 strike calls for $1.35 each, resulting in an initial net debit of $0.75 per spread.
Ideally, KSS will settle the week right at $45, which will return the maximum gain on the bought call, while the sold calls would be left to expire worthless -- resulting in a full potential profit of $2.75 (difference between the two strikes, less the net debit). Should KSS settle at or below $41.50, risk is limited to the initial cash outlay. However, a breakout above $45 could result in theoretically unlimited losses considering one of the sold calls is uncovered.
Widening the scope reveals options traders have been quick to buy calls in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day call/put volume ratio of 3.36 ranks higher than 96% of all comparable readings taken in the past year -- meaning long calls have been initiated relative to puts at a faster-than-usual clip.
Drilling down, Kohl's weekly 11/10 41-strike and November 44 and 44.50 calls have seen the largest increases in open interest over this time frame, with nearly 15,000 contracts collectively initiated. Data from Trade-Alert points to buy-to-open activity at each, confirming the recent trend toward long calls among KSS options traders.
Looking at the charts, KSS shares have yet to fill their early January bear gap, down 17.6% year-to-date. However, not all news is bad. In early September, KSS climbed above its 200-day moving average -- which had served as resistance for most of 2017 -- and appears to be successfully testing this trendline in today's trading.
This trendline could continue to be in focus on Thursday, after Kohl's reports earnings. The stock has a mixed history of post-earnings price action, closing lower in the session subsequent to the retailer reporting in four of the past eight quarters -- including the two most recent ones. On average, the shares have swung 8% regardless of direction, with the options market pricing in a bigger 12.6% move this time around, based on at-the-money implied volatility data.