Both Michael Kors (KORS) and Workday (WDAY) are down sharply today after earnings disappointments. KORS is trading lower by $12.25 or 20%, and WDAY is down $8.50, or 9.1%. While I don’t like putting on bullish positions in the hours, or even days, after such a dramatic selloff, there are many ways you can take advantage of this volatility using options.
Let’s say I thought the selloff in KORS was overdone, and was willing to buy the stock at a lower price, perhaps at 42.50. One bullish trade I could execute would be the sale of the August 42.5 Puts for $1.00.
The best case scenario with this trade would be KORS closes above 42.50 on August expiration. If the stock doesn’t drop another $5.50, I would collect $100 for every put I sold.
However, if KORS closes below 42.50 on August expiration, I may be forced to buy 100 shares for every put I sold. That said, I wouldn’t experience any losses until the stock traded at 41.50, as I collected $1 via the sale of this put. (Note that 42.50 was the predetermined level at which I was willing to buy the stock. )
At that point, if KORS closed below 42.5 on August expiration, and I took delivery of the stock, I could then begin to sell calls against my new stock position. This long stock, short call position is a buy-write. (Note that when executing the sale of a put, you need to have the capital in your account to cover the stock you may be forced to purchase if the stock closes below 42.50)
Far too many investors and traders are afraid to sell puts. I’d counter that the worst-case scenario when selling a put is that you’ll be forced to buy the stock at your predetermined entry point. And if a stock like KORS rallies, is unchanged, or does not fall another $5.50, you will collect a nice premium.