Capri Holdings: May 17 $35 Unusually Active Call Option Is a No-Brainer

The markets look to head lower in Thursday trading after Meta Platforms (META)provided weaker-than-expected Q2 2024 revenue guidance combined with higher capital expenditures. As I write this before the markets open, the S&P 500 futures are down nearly three-quarters of a percent. 

My job on Thursdays is to find a compelling call or put option to buy or sell that’s experiencing unusually active options activity, defined as a Vol/OI ratio of 1.25 or higher. 

On Wednesday, Capri Holdings’ (CPRI)May 17 $35 call was active with a Vol/OI ratio of 526.92, almost three times Equitrans Midstream’s (ETRN)May 17 $35 call at 187.62. 

With three weeks and a day to expiration, the CPRI call’s ask price was $1.25 at the close, a down payment of 3.6%, a reasonable amount considering the upside potential in near-term, mid-term, and even long-term. 

Whoever was buying the 62,177 call contracts yesterday was right on the money. Here’s why. 

The Only Regulator to Say No

The owner of premium and luxury brands Michael Kors, Jimmy Choo, and Versace is trying to combine with Tapestry (TPR), the owner of Coach, Kate Spade, and Stuart Weitzman, to create a North American competitor to LVMH (LVMUY).

For some ridiculous reason, the FTC (Federal Trade Commission) has decided to sue the two companies to block the transaction, arguing that the combination would lead to higher prices for consumers. 

Oh, the humanity of higher-priced handbags. Higher prices should not be a concern if you can afford to shop at these stores regularly. The FTC is barking up the wrong tree. It should spend a little more time investigating the wireless cartel or, more recently, the sports streaming cartel. These are expenses we all share. 

Capri’s press release addressing the FTC’s actions said it best.

“Tapestry and Capri operate in the fiercely competitive and highly fragmented global luxury industry. Consumers have hundreds of handbag choices at every price point across all channels, and barriers to entry are low,” the company’s press release stated. 

I don’t know how much LVMH pays to lobbyists in Washington, but it’s got to be significant. The logic behind this particular challenge boggles the mind. 

“The U.S. FTC is the only regulator that did not approve this transaction, which received required approvals from all other jurisdictions,” the statement continued. 

The Biden administration has an opportunity to back a Made in America solution for luxury goods that would be able to compete with Bernard Arnault (LVMH) and all the other luxury conglomerates from Europe and Asia. 

This suit is a waste of taxpayer dollars. Pure and simple. 

Who Was Buying?

At 10:09 Wednesday morning, a trade for 29,615 May 17 $35 calls happened at $1.00 per contract. That’s an even lower down payment of 2.9%. Twenty-three minutes later, another 29,605 traded at $1 per contract. Those two trades accounted for 95% of the volume. 

Somebody is betting that the FTC will quickly retreat from its position over the next 22 days.

Consider that the 59,220 contracts from the two trades cost the buyer $5.9 million. To you or I, that’s a massive chunk of money. For the individual or institutional investor doing these trades, it’s petty cash. 

A likely buyer of these calls could be someone long Tapestry. Bernstein analyst Aneesha Sherman raised her target price by $2 yesterday to $48, 20% higher than where it’s currently trading.  

“Bernstein analyst Aneesha Sherman pegs the deal’s chances around 50% but raised her Tapestry price target by $2, to $48. That’s because either way, there’s ‘asymmetrical upside’ for the stock, ‘with very limited impact if the deal closes, and around 40% upside if it breaks, with good fundamental long-term upside either way,’” Barron’s reported. 

Betting $100 per contract to possibly gain $2,100 on that contract [$57 offer price less $35 call and $1 premium], a nearly 35,000% return on an annualized basis, is a brilliant bet in my books.  

The Bottom Line on the Tapestry/Capri Tie-Up

According to the terms of their agreement, if the deal fails, Tapestry could be on the hook for up to $50 million for Capri’s expenses. 

Even before raising capital for its $8.5 billion purchase of Capri, Tapestry had $654 million in cash and short-term investments on its balance sheet (Sept. 30, 2023), leaving it plenty to pay the $50 million. However, due to the debt added in Q2 2024 (Dec. 31, 2023) for the acquisition, it finished the second quarter with $7.5 billion in cash, a massive amount sitting around waiting for the lawyers to complete the deal. 

The worst-case scenario for the company is that it's out $50 million. In the best case, it has more firepower to take on Bernard Arnault, doubling the number of brands in its stable. That’s priceless. 

I’m rarely optimistic about significant acquisitions, but when this one was announced, I was very enthusiastic about the opportunity for the U.S. to gain a luxury conglomerate to compete with LVMH.

Imagine the U.S. is the world’s mightiest economy, with more billionaires than other countries except China. Yet, it doesn’t have a luxury homegrown conglomerate to serve all these wealthy people. I guess that’s why so many Americans go to Europe and Asia.

As options bets go, yesterday’s Capri action was a no-brainer.