With the S&P 500 flirting with all-time highs, stocks across the board have been basking in profits. But not all equities have been good little boys and girls. Some stocks of ill repute completely sat out the post-election ramp. Many such stinkers reside in the retail sector with one of the worst being Michael Kors Holdings Ltd (NYSE: KORS ).
And therein lies opportunity. Bearish opportunity, to be exact.
The trend of KORS stock has been heading southbound for years now. Since peaking near $100, the stock has fallen some 60% to its current perch. It has almost completed a round trip back to its 2011 initial public offering price of $25.
After tumbling into year-end, KORS has spent the first three weeks of 2016 in digestion mode. Rather than recovering from the swift descent, the stock has been basing sideways, setting up a possible breakdown setup in the process. If the low of the range ($41.85) gives way, watch out below!
The struggling stock's next stop could be $40. This zone is a support level from last May, making it as logical a target as any.
On the volatility front, KORS stock options are pumped. The rise is due in large part to its earnings announcement scheduled for Feb. 7. The stock has a history of staging large price gaps following earnings, so holding into the event isn't without risk.
However, the elevated implied volatility should allow us to sell a spread far enough out-of-the-money to offer some measure of safety.
How to Trade KORS Stock Right Now
If you're willing to bet Michael Kors sits below $47.50 at February expiration, consider the following bear call spread. Sell the Feb $47.50/$50 call vertical spread for 30 cents. The max reward is limited to the initial 30-cent credit and will be captured if the calls sit out-of-the-money at expiration.
The max risk (and cost) of the trade is limited to the spread width minus the net credit, or $2.20, and will be forfeited if Michael Kors Holdings rips above $50 by expiration.
To reduce the loss, you could always jump ship if the stock rises to the short call strike of $47.50.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
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