High end retailer Michael Kors (KORS) reports earnings on November 5.
What is important to note is something that has nothing to do with earnings but can be very important to KORS price in the next week. KORS is replacing NYSE’s Euronext in the S&P500 Index. Why is this important? Think about index funds and ETFs. What does a portfolio manager who manages an index fund on the S&P have to do? He or she must purchase KORS to accurately reflect its new role in the index.
Their entire job is to perfectly mimic the index and the best way to do this is to hold the proper allocation in the underlying. So, this happens today. There’s one piece of bullish evidence. Also important to note is some bullish fundamental news: Morgan Stanley says channel checks on Michael Kors (KORS) show FQ2 strong traffic patterns.
TRADE SET-UP
As a result of the extra traffic, the investment firm raises its forecast for Q2 EPS by a penny to $0.68. Of the same mind, Canaccord Genuity says Michael Kors took market share from Coach in the logo business during the quarter. So, we have a very compelling case for an upside play up to and perhaps even including earnings. Buy the 11/8 80 Call and sell the November 82.5 Call.
My methodology suggests a maximum potential loss of $0.10-0.15 and if we get the projected move from the straddle prices in the market now, I am looking at a maximum potential profit of well over $1.00. That is unbelievable reward to risk with the absolute potential loss very small.
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