Today, we have a unique opportunity that means we’re going to do something a little different.
If you’ve been with Precision Profits for a while, you’ll remember we’ve used this trading strategy before — it’s what I like to call a “reversal.”
A reversal is when we close one of our call or put options, while opening an opposite position in the same company. We do this because we’re nearing the end of one seasonal trend and entering the start of another. For example, we did this back in June when we closed calls and opened puts in Big Lots. Although we had to close the calls for a loss to capture the upcoming trend, our new puts brought us a gain of 109% in less than two weeks.
Today, we’re doing the same with Kohl’s (NYSE: KSS), the large retailer with a heavy concentration in the Northeast. (Our last Kohl’s trade was also a reversal, which you can revisit here.)
In late July, we bought calls on Kohl’s to benefit from the company’s historically profitable back-to-school shopping season. Unfortunately, we got in just ahead of the market’s turbulent period. So, when the company missed expectations in its August earnings release due to late back-to-school sales, market volatility kept shares below our strike price.
From time to time, these one-off events will disrupt a historically strong trend, but its stock pattern will eventually kick back in. Plus, well, you just can’t win them all. But our track record of numerous triple-digit winners means we can swallow a loss every now and then.
Now, it’s time to hop onto Kohl’s next seasonal trend…
From now through January, it historically drifts lower: Back to at least 2009, the stock has dropped between 7% and 25% during that period … plenty enough (consistently) downward momentum to bring us nice profits.
As Chris Orr has told me multiple times when we discuss this stock: Kohl’s customer base is extremely weather-sensitive. The company sees fewer customers when the weather turns cold, snowy or rainy. As a result, its revenue in the Northeast and Midwest takes a hit during extreme winters — which is exactly what Chris is forecasting this season. In fact, Kohl’s stores in the South Central and mid-Atlantic regions will also likely experience less traffic this winter as storm systems bring stretches of heavy rain and wind.
So today, we are going to reverse our Kohl’s trade by closing our calls for a loss and opening the January 2016 puts.
Here are the trades to make:
Action to take: Sell to close the KSS January 2016 $62.50 call option (KSS160115C00062500) at the market. At last glance, it was trading at $0.05.
Action to take: Set a Good ‘Til Canceled limit order to buy to open the KSS January 2016 $47.50 put option (KSS160115P00047500) at $3.70. At last glance, it was trading at $3.55. If your order is not filled by my next dispatch, I will update you on the trade.
Please note that this time we are buying a put option, which is a bet that the share price will fall, not a call option.
As Kohl’s heads into its weak season, which has traditionally lasted through about February, our January put options will capture the downdraft. I see no reason why that historical trend will buck this year.
Portfolio Updates: Vail and Columbia
There’s some good weather news for skiers — and for investors like us who have calls on Vail Resorts (NYSE: MTN). And our position is already up 55%.
I’ll let Chris take it from here:
The Rocky Mountain ski season opens the weekend before Thanksgiving, and snow is already falling! Colorado was hit with a storm that dropped up to a foot and a half of snow yesterday and today.
Another six inches will fall there next Wednesday, and while Park City, Utah, will get a little less, the weather there is cold enough for man-made snow. Another batch of snow will sweep in during the opening weekend, which will keep up a once-a-week pace through December.
Meanwhile, the stormier weather — with its rain, wind and snow — will become more active east of the Mississippi River. The weather pattern will benefit Columbia Sportswear (Nasdaq: COLM) as folks look to stay warm as the weather gets chillier.
While we’re on the topic of Columbia, I want to address last week’s trade alert.
For those who didn’t see it, Columbia was cruising higher after reporting strong earnings, so I recommended closing half of our position for a 100% gain.
Here are the details: Set a Good ‘Til Canceled limit order to sell to close one half of your position in the COLM January 2016 $55 call option (COLM160115C00055000) at a price of $8.20 — or whatever price gives you 100% based on your original cost.
However, by the time the trade hit your inbox, the price had moved again, and it’s likely that you were unable to get your orders filled. That’s fine — and that’s how rapidly prices can move in the options market. We’re going to keep that order in place as Columbia’s seasonal uptrend continues to play out. I expect shares to climb back up, allowing us to secure another big winter gain.
Until next time, good trading…
Editor, Precision Profits