Why Selling Put Options on Tapestry Might be a Smart Move [Earnings Season]

Introduction:

 In the fast-paced world of finance, opportunities often arise from market disruptions and fluctuations. The recent announcement of Tapestry's potential acquisition of Capri Holdings, coupled with a significant stock price drop, has created an interesting scenario for investors. While the initial market reaction might be unsettling, this article explores why this could be an opportune moment to consider selling put options on $Tapestry Inc.(TPR)$.

Understanding the Situation:

On August 10, 2023, Tapestry faced a steep decline of around 16% following the news of its potential acquisition of Capri Holdings. However, rather than viewing this as a reason to steer clear, astute investors see this as a time to seize potential gains through the strategic use of put options.

The Oversold Signal:

One of the key indicators suggesting an opportunity is the Relative Strength Index (RSI). The 14-day RSI for Tapestry has dropped below the 25-mark, indicating that the stock has entered oversold territory. This oversold condition can often lead to a rebound, as the downward pressure on the stock might be temporarily exhausted.

Tapestry Day Chart

Furthermore, the weekly RSI hovering around 35 also hints at the stock's proximity to oversold levels. These combined indicators could signal an imminent price correction, making it an opportune time to consider entry.

Tapestry weekly chart

Earnings Report Influence:

 Tapestry's upcoming earnings report, scheduled for August 17, 2023, adds another layer of intrigue to the situation. The volatility often associated with earnings announcements can work in favor of those who strategically position themselves using put options. 

Selling Put Options Explained: 

At its core, selling a put option involves receiving a premium from a buyer in exchange for the obligation to buy the underlying stock at a predetermined price (strike price). There are two likely scenarios when selling put options on Tapestry: 

Option Expiry Worthless:

If Tapestry's stock price remains relatively stable or experiences a modest rebound, the put options could expire worthless. In this case, the seller gets to keep the premiums collected upfront, effectively generating profit without having to buy the stock. 

Stock Purchase at a Discount:

Should the stock experience a further dip due to unfavorable earnings or market sentiment, the seller of the put option would be obligated to buy the stock at the agreed strike price. This scenario might seem less appealing initially, but when considering the context of Tapestry's acquisition plans, it could be viewed as an opportunity to acquire the stock at a discounted price. The acquisition could potentially position Tapestry for long-term success, which would likely benefit its stockholders. 

Rationale for Investing in Tapestry:

 The potential acquisition of Capri Holdings presents a compelling case for Tapestry's future growth. Acquisitions often provide companies with enhanced market share, synergies, and new revenue streams. This strategic move showcases Tapestry's ambition and financial stability, both of which bode well for its long-term prospects.

Furthermore, the notion that the luxury goods market is generally less affected by economic downturns holds weight. The affluent consumer base that Tapestry caters to is often less impacted by recessions, as their spending patterns tend to remain relatively stable. 

Conclusion:

In conclusion, the confluence of factors – the oversold signal, impending earnings report, and potential acquisition – makes the current juncture a compelling time to consider selling put options on Tapestry. Whether these options expire worthless or result in acquiring the stock at a discount, both outcomes appear favorable. As with any investment strategy, careful consideration and risk assessment are crucial. Investors seeking to tap into the potential of Tapestry's future success should not overlook the possibilities presented by this unique market situation.

For Tapestry, what do you think is a good strike price/date for Put Options selling? Share your insights and opinions in the comments section below.

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