When I first saw the quantitative setup for Kohl’s (NYSE: KSS), my mind rejected it as highly implausible, if not outright impossible. While the fundamental case for KSS stock may be reasonably criticized — especially amid the current macro environment — there’s no denying that the equity has become a favorite meme play. It goes up even though there doesn’t seem to be a good reason for it.
At the same time, there’s the school of thought that a ticker can only overcome gravity for so long. You can talk about short squeezes until you’re blue in the face. Usually, when traders are willing to bet against a security, there’s conviction behind the transaction. In the case of KSS stock, its short interest stands at nearly 30% of its float, which is gargantuan.
No wonder why Kohl’s stock draws so much attention. With short interest exposure of that magnitude, there’s a risk of retail traders bidding up KSS out of spite. If that happens, a short squeeze may materialize, which involves bearish traders covering their short positions by buying back the equity. Of course, because of heightened demand due to collective panic, these traders will be acquiring shares at increasingly higher levels.
That’s good for the bulls and obviously not so much for the bears. The problem, though, is that the timing of such activities isn’t always consistent. Otherwise, KSS stock wouldn’t have a year-to-date loss of more than 4%.
So, in the interest of time, here’s my 20-second elevator pitch. Right now, KSS stock has flashed a rare quantitative setup, which historically suggests steep downside for the ticker. Adding to the concerns, there appears to be technical resistance at the $19 to $20 level. If historical fears turn out to be accurate, the 16/14 bear put spread expiring Dec. 18 (which is about 11 weeks away) could be a legitimate target.
Why the $14 Second-Leg Strike for KSS Stock?
Naturally, the first question that may pop up for traders is, why the 16/14 bear spread expiring for the December monthly chain? Mechanically, I’m looking at a combination of a low entry price and a reasonably high payout.
Let’s just be real and state upfront that the U.S. equities market generally has an upward bias. That bias usually applies to blue chips and not names like Kohl’s stock. But because KSS is a popular meme play, there is nevertheless a true risk in betting against the ticker.
Still, the debit-side bear put spread makes such plays intriguing. First, the net debit (cash outlay) required per spread is only $75. If KSS stock happens to catch a bullish wave and the spread completely blows up, the most that can be lost is the $75 you put in. However, the payout is asymmetric in your favor. Should KSS trigger the second-leg strike on expiration, the maximum payout clocks in at $125.
Basically, you have a chance of getting back more than you risk. That’s important because under risk management theory in the equities market, you stand a better chance of success if you keep your losses small but your payouts massive.
As for the reason why the bear spread itself may be the appropriate transaction, the discipline of technical analysis may offer supporting evidence. If you look at a weekly chart of Kohl’s stock, you’ll notice that since late June, there have been three distinct attempts to break out of the $19 to $20 resistance level, with each time resulting in failure.
Source: StockCharts
Currently, KSS stock is bouncing against this resistance level again. The assumption, of course, is that the fourth time may not be the charm. If not, the bears could get ambitious and break below the $16.50 support level and possibly down to $14 by the December monthly expiration date.
Probability Matters for KSS Stock (But in a Nuanced Way)
To be clear, risk management is a key part of options-related success, but I would argue that it’s not the only methodology. In my opinion, you can’t just risk manage your way to riches because you still need to “probabilize” the problem at hand. In other words, if you have correct risk management but the wrong probabilistic framework, your trade will likely end in failure.
However, we can’t just rely on universal claims of high-probability trades because the discipline isn’t purely scientific. Sure, the mathematical structure behind probabilistic axioms are legitimate — they produce the outcomes they claim to produce. But the question of which framework to use is at least partly philosophical.
Ultimately, we don’t really care about defining specific equities as “bullish” or “bearish,” as these assets are not static. Most will agree that valuations go through transitions. What appears to be a terrible investment one year can be a lightning rod the next.
So, as options traders, we shouldn’t worry about the current label of KSS stock. What matters is the probability of transition from its current state to its future state.
To put it bluntly, what I’m concerned about with Kohl’s stock is the likelihood of it transitioning to a bearish state, even though right now, circumstances look good. Even a shutdown relief pitcher can get touched up if he’s tipping his pitches.
What Makes KSS Susceptible to a Downturn?
What then would make KSS stock susceptible to a downturn? The answer lies in its contradictory quantitative setup. In the last two months, KSS has printed 10 weekly candlesticks, with only four of them leading to net positive price action. Stated differently, within the defined period, 60% of the unit-wise volume incurred drawdowns.
That would ordinarily be considered bearish. However, the overall slope across the 10-week period was positive, not negative. So, we have a contradiction: positive slope but with more down weeks than up within the aforementioned timeframe.
Why is that concerning? Because of the six times that this setup has flashed since January 2022, KSS stock has usually witnessed a dramatic falloff, with enough frequency that there may be an 83% chance that the ticker slips below the $14 level by the 10th week. Subsequently, it’s not much of a stretch to assume that the bearish target could be triggered on Dec. 18.
Of course, such a horrendous forecast assumes that history will repeat itself — something that is never guaranteed. But if it does, KSS stock may be looking at a heap of trouble.
