Kohl's (KSS) Trading Strategies for Bulls and Bears

Kohl's option strategies With the holiday shopping season now officially unleashed, analysts and investors are reviewing the nation's publicly traded retailers. Early this week, Bank of America adjusted its 12-month price target on Kohl's KSS to $60 from $55, maintaining a “buy” rating.

The firm said November sales numbers are poised to rebound following a weak October. A price target of $60 implies less than 10% of upside from current levels. This would be roughly on par with the stock's 12-month return of 6%. In the last three months, however, KSS shares have increased by more than 16%.

For the most part, Wall Street appears pretty optimistic about the company's outlook. Of the 22 analysts following the stock, 18 have given the retailer a rating of buy or outperform, with zero sell ratings to speak of. The Research tab on the OptionsHouse platform provides analyst opinion information along with price charts, upcoming corporate events, news, fundamental data, and more. This information is available to all customers, including those with a virtual trading account.

While stock analysts are limited to the buy-hold-sell rating scale, option traders have a number of different strategies at their disposal. Calls and puts can be bought and sold with a variety of goals in mind, whether the investor's outlook is strongly or moderately bullish or bearish, neutral or volatile. For Kohl's, we have outlined one moderately bullish strategy and one bearish strategy (with a caveat).

The profit/loss profile of a bull call spread and a ratio put spread are detailed below. These are for educational purposes only and are not recommendations to sell or buy. All prices are as of Wednesday midday, when KSS shares were trading at $56.10, down 32 cents for the day.

Bullish Option Strategy: Bull Call Spread

Investors who expect KSS to have a strong holiday shopping season could look into a moderately bullish options trading strategy like a bull call spread. The January 55/57.50 long call spread is currently priced at a debt debit of $1.30 (buying the 55 call and selling the 57.50 call).

At expiration, profit is maximized at $1.20 (the difference in strike prices less the premium paid) if KSS is trading above the 57.50 strike. The spread will be in profitable territory as long as KSS is trading above the breakeven price of $56.30 (the long strike plus the premium paid).

Losses are capped at the premium paid ($1.30) and are maximized below the 55 strike at expiration. Return on risk is 92% in roughly 50 days.

Profit and loss of Kohl's (KSS) bull call spread

Bearish Option Strategy: Ratio Put Spread

Think Kohl's can't keep pace with the competition? Consider a ratio put spread, which has bearish exposure down to a predetermined point. Investors could buy one January 55 put and simultaneously sell two January 50-strike puts. There is no net debit to trade this currently (other than commissions) as the 50 puts are selling for $1.00 apiece and the 55 put is trading for $2.00.

At January expiration, the maximum potential profit is $5.00, which is th e difference in strike prices less the (nonexistent) premium paid. The investor collects the maximum profit if KSS is trading right at the short strike (50) when the options expire. The breakeven prices for this trade are $55 to the upside (the long strike) and $45 to the downside (the short strike less the maximum profit). The trade provides a bearish hedge of about 20% down to the 45 strike from its current price.

If KSS were to rally, the investor loses nothing (as upside losses are capped at the premium, if any, that is paid). Downside risk is significant, however, because of the uncovered short put that is in-the-money below 50 (the other short put is effectively cancelled out by the long put). If KSS were to decline sharply and breach the $45 mark, losses would be equal to that of a long stock position.

Profit and loss of Kohl's (KSS) ratio put spread