Dear Momentum Options Subscriber,

One of my favorite retailers to play options on is Kohl’s (KSS, $39.22, up $1.52) and, with the company scheduled to report earnings Thursday morning, there may be an opportunity to go long or short.

Analysts are expecting the company to earn $1.04 a share on revenue of $4.16 billion. The high estimate is pegged at $1.12 a share, with a lowball number at $0.94 a share. This could mean a headline beat of $0.08 or an earnings miss of $0.10 a share.

Kohl’s missed last quarter’s estimate by $0.06. In the two prior quarters, profits came in $0.02 and $0.06 higher. In the year-ago period, the company missed the estimate by $0.09. Although KSS is highly profitable, the sketchy earnings history over the past year makes it hard to trust the company given the current cutthroat retail environment.

Some channel checks by various boots-on-the-ground analysts have said that inventories were up and that poorer quality items are not selling so well. I don’t personally shop at Kohl’s, but I have noticed that the parking lot at my local store looks deserted during shopping hours. If inventory is a drag, Kohl’s might have to sell its spring and summer digs at a discount.

The bullish argument is that Kohl’s recently announced a new partnership with Under Armour (UA, $39.40, up $0.09) in an attempt to add more “hipster” clothing. However, inventory write-offs could cause an earnings miss and a lowered outlook for the rest of 2016. Additionally, Under Armour products won’t be available at Kohl’s stores nationwide until early 2017.

KSS shares fell 4% on Tuesday and are trying to hold the 50-day moving average at $38, which is in a rising uptrend. The 100-day moving average is just south of $40, and there is a good chance that shares move 5%-10% following the earnings announcement. This means a move above $41 or below $37-$36 could be in the mix.

As option traders, this is the type of action I look for when determining to go long or short. We played bearish positions in Kohl’s this year and last for slight gains, but I’m a little hesitant this time around with analysts so bearish. However, traders could hedge a KSS trade using both call and put options.

As a directional trade based on weaker fundamentals, bearish traders could target the KSS August 37.50 puts (KSS160819P00037500, $0.70, down $0.70). These options are very risky, as the stock would need to fall below $36.80 by next Friday to break even. However, if shares slide below $36.10, these options would return 100% from current levels.

The KSS August 42.50 calls (KSS160819C00042500, $0.35, up $0.15) could be used by bullish traders looking for a “beat-and-raise” quarter. These options would double from current levels if shares clear $43.20, technically, in nine days.

Both aforementioned options, purchased together, would create a “strangle” option trade for a combined premium of $1.05. The breakeven price, technically, would be below $36.45 or above $43.55 by next Friday. A 100% return could be achieved if KSS shares fall below $35.40 or clear $44.60 by Aug. 19.

The technical outlook looks bullish despite the sloppy bearish fundamentals. With these options expiring in less than two weeks, I don’t like the setup going into the earnings announcement, so I will likely stay on the sidelines this time around. There could be a trade afterwards on KSS, but I don’t like the risk/reward setup right now. A “sell-the-news” event looks likely, but it is still a risky trade.

Turning our focus to the broader market, Dow is down 35 points to 18,497, while the S&P 500 is lower by 5 points to 2,176. The Nasdaq is declining 19 points to 5,206, and the Russell 2000 is off 8 points to 1,223.

I have updated our current trades below, so let’s go check the tape.

Momentum Options Play List

Closed Momentum Options Trades for 2016: 61-21 (74%). All trades are dated and time stamped so new subscribers can look at the past history to see how the trades have played out.

Do not risk more than 5% of your trading account on any one trade but do try to take all of the trades. Please remember, all “Exit Targets” and “Stop Targets” are targets. You should not have any “Hard Stops” entered to close any trades or “Exit Orders” in your brokerage account unless I list one. I will send out a “Profit Alert” or “New Trade” if I want you to close a position or if a new trade comes out. Otherwise, follow instructions at all times in the 9 a.m. and 12 p.m. – 1 p.m. updates. Also, I will usually give you a heads-up if I think I’m going to send an email outside of these time frames.

All prices given in this update are current as of 12:55 p.m. EST.

I hereby disclose that I will be participating in the following trade(s).


MGM Resorts International (MGM, $24.76, down $0.14)

MGM September 25 calls (MGM160916C00025000, $0.69, down $0.07)

Entry Price: $0.70 (8/8/2016)

Exit Target: $1.40


Stop Target: None

Action: Support is at $24.25-$24, followed by $23.75 and the 50-day moving average. Resistance is at $24.75-$25. The 52-week high for MGM is at $25.29.


Bank of America (BAC, $14.93, down $0.26)

BAC September 15 calls (BAC160916C00015000, $0.38, down $0.12)

Entry Price: $0.50 (8/8/2016)

Exit Target: $1.00

Return: -24%

Stop Target: None

Action: Support is at $15-$14.75, followed by $14.50 and the 200-day moving average. Resistance is at $15.25-$15.50.


Rambus (RMBS, $13.57, down $0.23)

RMBS September 14 calls (RMBS160916C00014000, $0.28, down $0.11)

Entry Price: $0.40 (8/1/2016)

Exit Target: $0.80

Return: -30%

Stop Target: None

Action: Support is at $13.50-$13.25. Resistance is at $13.75-$14.


Vuzix (VUZI, $7.38, down $0.23)

VUZI September 10 calls (VUZI160916C00010000, $0.30, down $0.10)

Entry Price: $0.97 (7/27/2016)

Exit Target: $2.00

Return: -69%

Stop Target: None

Action: Support is at $7.50-$7.25. Resistance is at $7.75-$8.


Viavi Solutions (VIAV, $7.26, down $0.08)

VIAV September 7 calls (VIAV160916C00007000, $0.49, down $0.06)

Entry Price: $0.55 (6/23/2016)

Exit Target: $1.10

Return: -11%

Stop Target: None

Action: Support is at $7, with $6.90-$6.85 and the 50-day moving average serving as backup. Resistance is at $7.50. Earnings are due out on Thursday.

Trade on!

Rick Rouse
Editor and Chief Options Strategist
Momentum Options