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Kohl’s Unusual Options Activity Screams Strangle. Buy or Sell?

Will Ashworth - Barchart - Thu Sep 26, 12:30PM CDT

Some days, it takes every fiber of my being to come up with an idea for a post about unusual options activity. Not today.

I opened my computer, went to Barchart’s unusual options activity page, and staring me in the face as plain as day was a Kohl’s (KSS)strangle. That’s saying something because I still consider myself a newbie regarding options. You couldn’t miss it.

The Kohl’s put had a Vol/OI ratio of 147.77, making it the top unusually active option in Wednesday trading based on options expiring in a week or more and possessing a Vol/OI ratio of 1.24 or higher. The call was fourth-highest at 84.80, which is also relatively high.

That’s a textbook strangle. The question is whether it’s the long or short variety.

What’s a Strangle?

I asked Perplexity, “What do you call the option strategy where you have a call and put, with the same expiration date and different strike prices?”

It answered back, “The option strategy you’re describing, where you have a call and put with the same expiration date but different strike prices, is called a ‘strangle.’”

A strangle is when you have one call and one put on the same stock with the same expiration date but different strike prices. Typically, both are out of the money (OTM), which means the call’s strike price is higher than the current share price, and the put’s strike price is lower than the current share price.

If you buy the call and put, you have a long strangle and a short strangle if you sell them. Let’s consider both possibilities.

The Long Strangle

In this case, you’re buying both the call and put. Based on the ask prices, you would have paid $0.53 in premium for both—$0.40 for the $21 call and $0.13 for the $17.50 put—hoping that there is a large move in either direction.

On the call, you would be $169 OTM [$19.71 x 100 - $21.00 x 100 - $0.40 x 100] and $234 OTM on the put [$17.50 x 100 - $19.71 x 100 - $0.13 x 100].

Your maximum risk is $53 (premium paid), while your upside is unlimited.

The Short Strangle

In this case, you’re selling both the call and put. Based on the bid prices, you would have received $0.48 in premium for both—$0.37 for the $21 call and $0.11 for the $17.50 put—and you’re hoping that the share price stays within a range between $17.50 and $21, expiring OTM.

Your maximum risk is unlimited, while your upside is limited to your $48 premium received.

Which Is the Better Play?

Strangles are used when you believe the stock faces considerable volatility but are unsure in which direction. As a result of the different strike prices, it’s a lower-cost alternative to straddles, which involve a put and call at the same strike price and expiration date.

Because straddles generally involve at-the-money (ATM) options, they’re more expensive than strangles.

It’s helpful to consider recent news about Kohl’s that has affected its share price or might in the future. It also helps to consider whether KSS stock is worth owning. Its shares have lost nearly 30% of their value in 2024, 60% over the past five years, and down 76% from their Nov. 1, 2018, all-time high of $83.28.

If you’re a contrarian, you could argue that reversion to the mean could be ready to jump into action, pushing its shares into the $20s or $30s over the coming weeks.

The company did raise its full-year outlook for profits in 2024 at the end of August.

Due to cost-cutting and reduced inventories, it now expects adjusted earnings per share as high as $2.25 in 2024, 40 cents higher than its previous guidance. Unfortunately, sales won’t be so lucky.

Thanks to a 5.1% decline in same-store sales in the second quarter, it has now experienced 10 consecutive quarters of declining same-store sales as its middle-income customers struggle with a higher cost of living.

“This is a classic death spiral where poor performance leads to cost cutting and crimping, which then leads to poor execution, which then leads to falling sales,” Bloomberg reported comments about Kohl’s second quarter from Neil Saunders, managing director at GlobalData.

Unsurprisingly, analysts rate it a Hold (2.58 out of 5) with a target price of $20.46, less than 50 cents higher than where it’s currently trading. Nor is it surprising that Barchart’s Technical Opinion is a Strong Sell in the near term with a weakening outlook.

As my Barchart colleague Mark Hake discussed yesterday, Kohl’s management said in the Q2 2024 press release that it is committed to its dividend program and strengthening its balance sheet. He said that its free cash flow (FCF) in the latest 12 months was sufficient to cover its dividend payments and debt reduction.

The Bottom Line on Kohl’s Stock and Strangle

My colleague points out that the retailer’s dividend should be safe. It currently yields over 10%, attractive for risk-taking income lovers but not necessarily what risk-averse investors should be clambering for.

If you believe Kohl’s stock is worth owning, the long strangle is the better choice for accomplishing that goal while limiting your financial risk.

While I like the idea of generating income from options, not to mention acquiring stocks at better entry points, the short strangle on a stock such as Kohl’s just doesn’t seem to be worth the risk.

However, yesterday’s unusual options activity suggests a big fish out there might feel otherwise.

More Options News from Barchart

On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.