|Kohl's (KSS), a retailer with very attractive earnings growth projections, may be offering option traders a relatively low-risk short put play, one that has a two-week time frame during which to realize a modest gain or loss. This is a worthwhile setup, especially for those traders with the self-discipline to cut potential losses short. Let's take a look (Figure 1).|
|FIGURE 1: KSS, DAILY. With a fresh CCI 12/10 buy signal today, KSS may be offering swing trades and option sellers a low-risk way to play for profits.|
|Graphic provided by: MetaStock.|
|KSS has enjoyed a great run since February 2009, having been up as much as 97% just prior to the recent pullback in the stock price. Currently, the stock has at least four significant technical dynamics that are suggesting that the stock has made a meaningful daily swing low, one residing above a slew of powerful support levels. Since the goal of this trade setup is to sell an out-of-the-money (OTM) put option at a strike price below several of those support levels, today's sharp intraday reversal in the stock takes on an even more attractive significance. Here are the technicals:|
1. The commodity channel index (CCI) 12/10 system (one discussed in a recent Traders.com Advantage article of mine from October 2009) has just fired a buy signal.
2. Long- and short-term money flows are both above their respective zero lines.
3. Multiple Fibonacci and chart support levels span the range from $50 to $51.
4. The rising 200-day exponential moving average (EMA) (near $49.50) should also offer support, just in case the stock sells off and temporarily drives our short put into the money.
In addition, the stock has excellent earnings growth projections, the broad market has made a convincing bounce that should carry higher into overhead resistance, and, even better, the option we'd like to sell only has two weeks of time value remaining before option expiration on November 20, 2009. See Figure 2.
|FIGURE 2: KSS, DAILY. Coincidence? Fibonacci 38% and 50% support levels from two separate swing lows also happen to coincide with strong chart support near $50–51. Note today's sharp intraday reversal after the 38% level was touched.|
|Graphic provided by: MetaStock.|
|There are two ways to play KSS here -- both are simple, straightforward methods designed to keep losses small, just in case the market reverses. The first is to place a limit order to sell one November 2009 KSS $50 put option (KSSWJ) for a price of $0.55 or better. The idea here is that the order gets filled on an intraday pullback on November 6, 2009, before KSS shares begin to move higher -- at least that's the plan. If filled, simply monitor the price of the stock, making sure that it doesn't get too close to that $50-51 support level on a sharp spike lower. If it does spike lower and the option doubles in price, consider buying it back for a modest loss. But if shares just meander back and forth, plan on holding the short put through expiration -- time decay will be devouring ever-increasing chunks of the put's time value with each passing day, and there's also a good chance that the option's implied volatility level will also begin to fall, too. |
Since this short $50 put's value is composed solely of time value (having no intrinsic value whatsoever, being an OTM option), these are powerful edges to help stack the odds in your favor right from the trade's inception.
|FIGURE 3: KSS SHORT PUT. Entire books have been written about the phenomenon of option time decay, but all you really need to know is here. Without the underlying shares moving a penny up or down, the option will continue to lose time value, piling up profits for savvy option sellers.|
|Graphic provided by: ThinkorSwim.|
|Traders not comfortable with selling puts can simply run the setup as a swing trade, being sure to place a fixed 8% initial stop as soon as the shares are purchased; the CCI 12/10 system calls for an exit at the next session's open as soon as a daily CCI (10) reading of +100 is achieved on a closing basis (on the daily chart). That's the ideal system exit, but if you get a little impatient, you may want to trade like some professional commodity traders and take a third of the position off once the stock rises by a value of one ATR (10) unit. That's about $1.80 for shares of KSS, based on the stocks' ATR (10) value. (See Figure 3.) |
At that point, bring the stop up to breakeven and wait for the shares to gain 1.62 * ATR (10) from the entry price (about $2.92) before pulling off the next third of the original position. At that time, begin trailing the balance of the position with a two-bar trailing stop of the lows and let that take you out of the final portion of the position. If the trade pans out as planned, you may or may not make more money by using the standard CCI (10) system exit, as it will exit all of the shares once the upper CCI target is hit. However, using the alternative trade management method may allow you to experience a greater sense of control over the trade and may even help permit a trending move to be allowed more room to run before final stopout.
|So, there it is -- a couple of ways to play what appears to be a low-risk swing reversal move in KSS. Limit your trade size upfront, in most cases risking no more than 1% of your account balance on this particular setup, regardless of how many puts you may sell or shares you may buy.|
|Title:||Writer, market consultant|
|Company:||Linear Trading Systems LLC|
|Jacksonville, FL 32217|
|Phone # for sales:||904-239-9564|
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