By Jud Pyle, CFA, chief investment strategist for the Options News NetworkKohl's ( KSS) was up about 2% today, outperforming the market and continuing its recent winning ways. Earnings are not due to be reported until after the market close on May 14, but investors are scooping up Kohl's along with shares of other retailers after firms such as Coach ( COH) and PF Chang's ( PFCB) reported better-than-expected earnings this week. The possibility that retailers are getting to the bottom of their earnings cycle has the bulls out and about.
But why buy a far-out-of-the-money, long-term put on a stock that has been in recovery mode, when there's increasing buzz about a retailing turnaround? Well, the buyer might believe that implied volatility levels on these October options are cheap relative to the potential realized volatility of KSS shares. At-the-money implied levels could be viewed as cheap, too; the October 45 straddle, currently trading around $11.30, is in line with 63-day historical volatility levels (46%) but below the 126-day historical of 65%. So the options market-makers currently offering the straddle at that level anticipate that the stock will behave more like it has in the last 63 days rather than how it moved in the fall. So, just because we're seeing some put-buying doesn't mean you should necessarily turn bearish on KSS. It's important to remember that an option trader's decisions are not always about company fundamentals or a stock's price action. Some options traders can become successful (or not!) trading off volatility levels and attempting to capitalize on those unique opportunities that come along every so often. Jud Pyle is the chief investment strategist for Options News Network (www.ONN.tv) and the portfolio manager of TheStreet.com Options Alerts. Click here for a free trial to Options Alerts. Mr. Pyle writes regularly about options investing for TheStreet.com.