SHLD and KSS Are a Perfect Example of This Rally’s Effect

4 | By Shah Gilani

On Wednesday, I covered what makes these markets look safer than they really are.

They’re being lead ever-higher by behemoth leadership stocks while the VIX plumbs ever-lower lows. Investors are doing very little hedging. Some of the bricks-and-mortar retail companies we’ve targeted are getting an extension put on their death sentence as they’re being lifted with the rising tide.

But that doesn’t mean that these companies are suddenly better. And it doesn’t mean that the positions you are already in that are preparing for their demise are now worthless.

Far from it.

Here’s what the VIX is missing, and how our positions in SHLD and KSS have been affected…

What Volatility?

There have been only 52 days this year when the S&P 500 index closed up or down more than 0.3%.

That’s eerily quiet – and it speaks to complacency. That’s passive investing rolling up the carpets before sundown.

That’s what is making the VIX and the anticipation of volatility so subdued.

But you need to look underneath the headlines of VIX doldrums… There’s a ton of volatility just below the surface.

Look what happens to stocks that miss revenue projections, or sales, or net earnings. They get hammered. That’s volatility, folks! It just doesn’t show up in the big picture VIX, thanks to leadership stocks like the Fab 5 and passive investing lifting what looks like all boats with the tide.

This is the most cautious I’ve been in many months.

We’ve just got to let this play out. It may take a few weeks more, but probably not more than that.

It’s not that the markets are going to suddenly collapse. It’s that after our bricks-and-mortar retail stocks have been floated higher, they’ll be at better levels for us to jump back on them (and hold their heads under water, so to speak).

The markets as a whole may keep on pushing higher. I knew they would, and I saw this coming a mile off. But if they keep going at the pace they’ve been going – which is actually showing a considerable slowing of momentum – we may be rounding a corner and approaching an inflection point.

Like I always say… It’s all good, until it isn’t.

If the broader markets take a breather, or worse, a tumble on profit-taking, that will spell really bad news for our favorite terrible stocks… Which means, of course, great news for us.

A Look Into Your Portfolio

The last time we checked in on the trades I suggested for Sears Holdings Corp. (NASDAQ:SHLD) and Kohl’s Corp. (NYSE:KSS), things were looking pretty great.

Now, not so much.

Here are those same trades, as of yesterday:

SHLD Puts Price as of 5/4/2017 Price as of 8/15/2017 Returns
December 2017 $9 puts 3.40 2.95 -13%
December 2017 $8 puts 2.70 2.20 -18%
December 2017 $7 puts 2.17 1.65 -24%
December 2017 $6 puts 1.61 1.14 -29%
December 2017 $5 puts 1.15 0.76 -34%
SHLD Puts Price as of 5/4/2017 Price as of 8/15/2017 Returns
January 2017 $9 puts 3.50 3.30 -5%
January 2017 $8 puts 2.77 2.67 -3%
January 2017 $7 puts 2.17 1.95 -10%
January 2017 $6 puts 1.62 1.38 -14%
January 2017 $5 puts 1.22 0.95 -22%
KSS Puts Price as of 5/8/2017 Price as of 8/15/2017 Returns
October 2017 $37.50 puts 3.40 2.09 -38%
October 2017 $35.00 puts 2.22 1.20 -46%
October 2017 $32.50 puts 1.45 0.55 -62%
October 2017 $30.00 puts 0.92 0.24 -74%
October 2017 $27.50 puts 0.60 0.12 -80%
KSS Puts Price as of 5/8/2017 Price as of 8/15/2017 Returns
January 2018 $37.50 puts 3.40 3.70 8%
January 2018 $35.00 puts 2.22 2.50 12%
January 2018 $32.50 puts 1.45 1.60 10%
January 2018 $30.00 puts 0.90 1.03 14%
January 2018 $27.50 puts 0.60 0.65 8%

All have taken a sharp dip from the double- and triple-digit returns they had back in May. But why?

This isn’t because these companies have turned around and are suddenly better. It definitely isn’t because they’ve seen and brilliantly fixed the glaring flaws in their plans for expansion.

No, SHLD and KSS are getting dragged out of the muck by the strength of every other company that is chasing higher highs in this historic market.

The truth is that Sears is going out of business, I’m sorry to say. A lot of people are going to lose their jobs and get badly hurt, but it’s inevitable. What’s most troubling is that a Sears bankruptcy could trip up the whole market.

The company sold off its worthwhile assets and doesn’t have enough buoyancy, either in terms of capital or cash flow, to sustain itself for much longer.

Looking at the stock, the only hope is for it to go above $10 and stay there. But there’s no reason for investors to bid it up from the mid $8’s to $10, none.

When the stock loses its footing here, it will go to $6.00 and that will be the last chance anyone has to get out alive. If there’s no miracle for Sears, then once the stock sees $6.00 and breaks below that, the once-great department store will freak everyone out and a declaration of bankruptcy will be only a matter of days or weeks away.

Those December 2017 and January 2018 put options I hope you own. They give you plenty of time and could net you a fat payday.

As far as Kohls, it’s looking at the KSS of death. Not that it is headed for bankruptcy… It could get there, but has more meat on the bone than Sears has for sure.

Still, the stock’s a total mess.

KSS just took its last gasp, breaking out of a long sideways to down move, and raising its heat to just under $45 intra-day in early August. Then, it collapsed.

The stock is back to $38 and change. Believe me when I tell you, it has to hold $35. It has to.

If it can’t hold $35 and breaks down, it’s going to $20. Hopefully by early October, so the value of those options turn around in time for you to rake in serious gains from Kohl’s long awaited demise.

It definitely is not time to give up on these positions yet.



4 Responses to SHLD and KSS Are a Perfect Example of This Rally’s Effect

  1. Lourdes says:

    HI Mr. Gilani,
    Well, evidently in the mean time, one could sell those puts and walk away with a tiny expiration profit. “I.f.” you could g.e.t. GBTC approved for Options trading… rather than just a CBOE monitoring agreement… you could play that until the cows come home. I have learned that Options can be protection… rather than risk… as many people see them… i.f. they a.r.e. used correctly. Puts can be helpful, if one does not get swept away or have too much on the plate.

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