Coach Sees Bearish Options Move

At least one options investor executed a ratio spread in anticipation of a drop in the stock.
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CHICAGO (TheStreet) -- During morning trading, a Coach (COH) options investor expressed a moderately bearish bet on the accessories producer and traded a ratio spread that simulates a short stock position.

Shares of COH are currently up 47 cents to $42.50 following the company's earnings announcement last night after the market closed. COH announced 50 cents a share, which beat estimates by four cents, and also beat revenue estimates.

At 10:34 a.m. EST, a one-by-two risk reversal crossed the tape thanks to an investor who sold 2,500 June 43 calls for $1.25 per contract and simultaneously bought twice the number of June 40 calls for $1 per contract.

The investor paid a net debit of 75 cents per spread ($75 per lot), or $187,500 in total for the trade. If COH shares drop below the breakeven price of $39.62, investors could make significant profits as the stock gets closer to zero.

On the other hand, if the stock rallies higher than $43, investors could incur unlimited losses to the upside. If the stock stays between $40 and $43, investors lose the net debit of $187,500 that they paid. A look at the profit/loss graph shows that this is a bearish trade, and will become profitable if the stock drops at least 6% throughout the later-term.

-- Written by Jud Pyle in Chicago

Jud Pyle, CFA, is the chief investment strategist for Options News Network. Pyle started his career in finance in 1994 as a derivative analyst with SBC Warburg. After four years with Warburg, Pyle joined PEAK6 Investments, L.P., in 1998 as an equity options trader and as chief risk officer. A native of Minneapolis, Pyle received his bachelor's degree in economics and history from Colgate University in 1994. As a trader, Pyle traded on average over 5,000 contracts per day, and over 1.2 million contracts per year. He also built the stock group for all PEAK6 Investments, L.P. hedging, which currently trades on average over 5 million shares per day, and over 1 billion shares per year. Further, from 2004-06, he managed the trading and risk management for PEAK6 Investments L.P.'s lead market-maker operation on the former PCX exchange, which traded more than 10,000 contracts per day. Pyle is the "Mad About Options" resident expert. He is also a regular contributor to "Options Physics."