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Coach Inc. (NYSE: COH) is plunging this morning following the company's earnings conference call. COH earned 41 cents per share for the quarter, beating analyst expectations by a penny, but the company gave a lower-than-expected outlook after saying that traffic in its U.S. retail stores is declining. COH also issued a "conservative" outlook for holiday sales. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on COH.After hitting a one-year high of $54.00 in April, the stock has been sliding over the past six months. This morning, COH opened at $38.00. So far today the stock has hit a low of $36.20 and a high of $38.94. As of 10:45, COH is trading at $37.22, down $4.25 (-10.3%). The chart for COH looks bearish and steady, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bearish hedged play on this stock, I would consider a February bear-call credit spread above the $50 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 4.2% return in 4 months as long as COH is below $50 at February expiration. Coach would have to rise by more than 34% before we would start to lose money.
COH has not been above $50 by more than a few cents since June, and has shown some resistance around $43 recently. This trade could be risky if this morning's earnings turn out to be better than they look at first glance, but even if that happens, this position could be protected by the strong resistance formed around $50, where COH topped out three times in the past 6 months.
Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: At publication time, Brent neither owns nor controls positions in COH.
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Reader Comments (Page 1 of 1)
10-30-2007 @ 6:39PM
CAROLINE said...
Coach has done several things that have angered and turned off their buyers and potential buyers and are paying a price for it now.
Quality is a big factor, outsourcing to China, selling in outlet stores, just to name a few. Coach is no longer exclusive and the company is pandering to high school age.
Coach was having great sales because many stay at home mom's and older retired women were buying from outlet stores and selling on eBay.com.
There were great numbers of these re-sellers who spent as much as $3-400, 000 per year.
Coach began eliminating them by banning them from buying at their stores, outlets and coach.com.
The re-sellers and their whole families received a letter from Coach Quality Control that banned them from buying for life. This is within Coach's legal right, but not a wise move to alienate so many.
This banning became known to many on chat boards and especially on eBay handbag and accessories board. There is much empathy and support from other members who read the chat boards. Hundreds have stopped buying Coach products for that reason as well as those stated above.