Back To School Disappointment For Kohl’s?

Kohl’s Corp. (KSS) - Family-oriented department store operator, Kohl’s Corporation, appeared on our ‘most active by options volume’ market scanner this morning after one investor initiated a bearish ratio combination spread on the stock. Shares of KSS are currently off slightly by less than 1% to stand at $49.58. Perhaps the investor responsible for the pessimistic play expects weaker back-to-school sales for the firm as he established a ratio put spread set to expire in September. The spread involved the purchase of 4,000 puts at the now in-the-money September 50 strike price for an average premium of 2.88 apiece against the purchase of 8,000 puts at the lower September 46 strike for 1.31 each. The net cost of the transaction amounts to just 26 cents and yields maximum potential profits of 3.74 if shares slip to $46.00 by expiration. The current market price of KSS is currently lower than the breakeven point to the downside at $49.74. That makes the trade already look attractive, while the investor would run into losses only if the share price slipped to beneath $42.26 at which point stored profits would be fully eroded.

Human Genome Sciences, Inc. (HGSI) - Shares of the biopharmaceutical company have blown right through the 52-week high of $15.45 today amid a current rally of more than 9% to $15.58. The stock surged after receiving an upgrade to ‘Buy’ and a price target of $26.00 at ThinkEquity. Our attention was drawn to a seemingly contrarian trade initiated in the January 2010 contract. The investor responsible for the transaction appears more concerned with downside protection than with continued gains in the stock. The sale of 4,400 calls at the January 19 strike price for 2.41 apiece was spread against the purchase of 4,400 puts at the way out-of-the-money January 10 strike for 2.55 per contract. The bearish risk reversal cost the trader 14 cents and yields downside protection beneath the breakeven point at $9.86. It is important to note that the short call position leaves the investor vulnerable to potentially unlimited losses in the event that shares continue to climb higher than $19.00 ahead of expiration. However, it is possible that this individual holds a long position in the underlying. In this case he would happily deliver shares at $19.00 if they are called away from him at expiration. He will have realized gains of at least 23% on the rising value of the stock from today’s price. Additionally, he is now long protective puts in case shares of HGSI plummet more than 36% by January’s expiration day.

The Mosaic Company (MOS) - Feeling the fallout from rival, ADM’s decline in earnings announced today, shares at Mosaic are lower by 1.3% at $54.34. One investor long of bullish August call options appears to have curbed his enthusiasm by swapping out an established August position, deferring instead to the same 55 strike in the September contract. The 2.60 premium payable on the soon-to-expire August contract suddenly appears rich in the aftermath of Archer Daniel Midland’s earnings miss based on contracting global demand. The question for investors in Mosaic is whether they can now see a 5.3% rebound in its shares, which is exactly what the premium indicates. Today’s option combination strategy implies that this investor believes this premium is better written while offsetting the cost of staying long through September’s expiration. The August premium helps offset a 4.40 premium payable at the September 55 strike, which implies that Mosaic’s share price will rally 9% by late summer. Option implied volatility is unchanged at 58.3%.

AES Corp. (AES) - Generating excitement among investors, not to mention electricity for its customers, shares at AES have moved from $5.00 in March to $13.27 today and if the options market is a reliable predictor of future price movements, investors are discounting a further 15% price gain within the next several weeks. We see two potential catalysts. Steady earnings are due this Friday and meeting its 20 cents per share expectation would leave the company trading at 13 times earnings. Second, Moody’s Investor Services recently lifted by one notch its ratings for investment grade regulated utility debt. Investors in the options market earlier lifted around 9,000 call options at the 15 strike expiring August 21. Option implied volatility rose heading into earnings and at 61% is 20% above the recent reading stretching back for the past two weeks.

Nuance Communications Corp. (NUAN) - The more than 12% rise in Nuance’s option implied volatility to 58% this morning landed the firm a spot on our option implied volatility scanner. An increase in the demand for calls throughout the trading session has pushed volatility higher to the current reading of 61%. This may imply that investors are expecting a more dynamic shift in the price of the underlying. Shares of the speech and imaging solutions company are slightly higher by less than 0.5% to stand at $13.32. Option traders were seen taking bullish stances on the firm by crying out for call options in the August and October contracts. The near-term August 15 strike price had approximately 2,100 calls picked up for 24 cents apiece. Shares would need to rally at least 14% in order for call-buyers to begin to profit at the breakeven point of $15.24. Bullish investors hoping for a more significant rally by expiration in October purchased 2,800 calls at the 17.5 strike price for an average premium of 24 cents per contract. Traders will begin to realize profits if the stock surges 33% higher to breach the breakeven point at $17.74.

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