We Made 20% On This Trade Last Time — Let’s Do It Again

Peter Lynch gave very good advice when he told investors to invest in what they know. And while I’ve found that many people still tend to ignore this most logical adage, it’s one rule I simply will not break.

To that end, I have found great success in going back again and again to the stocks I know best (and have made my Profit Amplifier subscribers and me money).

Michael Kors Holdings (NYSE: KORS) is one of those very stocks. About two weeks ago, we closed a quick trade in the luxury fashion brand for a 20.4% gain, and now it is once again flashing a bearish signal after a recent rally.

The recent jump in price means we can get back into a put options trade at the level we did before, and that makes me feel pretty good because I know things are only getting worse for KORS.

Investor sympathy and a hot market are what drove shares back up despite analysts becoming even more bearish. It’s this very equation that often produces the best results.

KORS: Things Only Getting Harder

Over the past few weeks, Zacks Investment Research downgraded KORS to a “strong sell”, followed by two drops in consensus earnings estimates for the upcoming quarter, from $0.63 per share down to $0.61 per share. A decline in the consensus estimate is one of the early warning signals that “trouble is on the horizon.”

The company is under pressure to “reinvent” itself, but just as we’ve seen from the big declines in Urban Outfitters (Nasdaq: URBN) and Abercrombie and Fitch (NYSE: ANF) — both of which I called — reinvention isn’t always easy. And in the clothing retail biz, it’s rarely successful.

And when analysts and activist investors are breathing down the company’s neck… watching every move it makes… actually executing a successful turnaround gets even more difficult.

But despite numerous strong headwinds, mounting industry pressure and a declining analyst consensus, shares of KORS have managed to rally nearly 10% from their mid-July lows below $33, where we took profits on our first trade. I see this as a solid trigger for us to jump back in and ride the wave lower.

Shares have continued to make a series of lower highs and lower lows — a bearish overall trend — and they should continue lower.

KORS is next scheduled to report earnings on August 8, and my earnings algorithm is signaling a miss. Even so, this will likely be a volatile event, which is why we are buying an extra month of time for this trade. As we’ve seen in the past, stocks can react in very odd ways after announcing earnings results before resuming more typical behavior.

For the recent KORS trade I recommended to my premium subscribers, I set a conservative target around $33, which is right around where we exited our prior trade. This is also a level we already know shares are capable of reaching. The way I see it, with such an easy-to-hit target, we may be able to watch the stock fall and get out before the earnings report is even released.

Make 28.6% From A 7.6% Downward Move

When I first recommended this trade to Profit Amplifier readers, KORS was trading around $35.70 (it’s around $36.44 now). I recommended buying (to open) KORS Sep 37.50 Puts for $3.50 or less. That’s a KORS put option with a strike price of $37.50 that expires on Sept. 15.

This put option has a delta of -0.57, which means it will move roughly $0.57 for every dollar that KORS moves. At this moment, the option is trading with a bid of $3 and an ask of $3.20, so there should be little problem entering the trade under my recommended price.

(If you are unfamiliar with put options or need a refresher on how puts work or how to execute a trade, we offer a free put option buying guide with each subscription to Profit Amplifier.)

Each contract you buy will cost about $350 (assuming you enter the trade at the “buy under” price — keep in mind you may end up paying less if you perform this trade).

Because each contract controls 100 shares of the underlying security, we multiply the $3.50 option price times 100. This is still much cheaper than shorting 100 shares of KORS, which would cost about $1,785 on a 50% margin.

This trade breaks even at $34 (strike price of $37.50 – premium of $3.50), about 4.8% below current prices.

The goal here is for KORS to drop to $33 by expiration on Sept. 15. If the stock reaches $33, the put option will have at least $4.50 of intrinsic value (strike price of $37.50 – stock price of $33) no matter how much time is left until expiration.

Once you’ve bought the put option, immediately place a good-’til-cancelled limit order to sell that option for $4.50. If the option hits our price target, we’ll generate a 28.6% gain in 51 days, or 204% annualized.

Again, keep in mind this trade is based on prices at the time I shared this with my Profit Amplifier readers a few days ago. So the numbers may be a little different, but there is still time to get in on this trade.

— Jared Levy

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Source: Street Authority