Coach (COH) Bulls Active in Long-Term Calls

Coach handbags may have been popular holiday gifts in December, but Coach stock continues to see its fair share of fans even into the new year. Tuesday afternoon, the January 2013 55-strike calls in Coach saw unusual activity, as more than 10,000 contracts changed hands.

Shortly after 1:00 p.m. Eastern Time, two blocks of about 5,340 each changed hands at this Coach LEAPS strike.  One block traded for $9.70 and another traded for $9.60.  A total of $10.3 million was spent on these transactions (average purchase price of $9.65 times 10,680 times 100).  It appears as though these out-of-the-money call LEAPS were bought to open.

While there is no intrinsic value in these calls, there is ample time value as they do not expire for nearly 750 trading days. Delta for these calls currently stands at 56. For every $1 move higher or lower in the stock, the calls will gain or lose 56 cents.  For example – all other factors being equal – if COH shares were to quickly move $2 higher from their current price of $52.28 to $54.28, that's a gain of 3.8% for the stock trader. The option position would theoretically rise from $9.65 to $10.77 (the purchase price plus two times 56 cents), a percentage gain of 11.6%.

Of course, leverage works in reverse as well. In other words, a two-dollar decline in COH means a 3.8% decline to $50.28 in the stock but an 11.6% drop in the option to $8.53.

When expiration rolls around two years from now, these calls have unlimited profit potential above the breakeven price of $64.65 – breakeven is simply the strike price plus the premium paid. Between the breakeven level and the 55 strike, losses build gradually until they are capped at the $9.65 premium paid. Anywhere below 55, losses are limited to this amount (unlike a long stock position, which has downside exposure all the way to zero).

The chart below – of this call's profit and loss potential at expiration – was created in a profit/loss calculator, one of many tools available to all OptionsHouse customers, including those with virtual options trading accounts. This calculator allows users to change inputs to gauge the impact of a shift in volatility, change in stock price, or deterioration in time until expiration.  It's a long time between now and January 2013 expiration – any number of scenarios could happen so it is important to be cognizant of how different factors may impact your trades.

Photo Credit: dicharry

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