Bullish Option Activity In Kate Spade May Suggest A Decent Premium Is Still In The Cards

A seemingly sure-fire M&A play just a few months ago, shares of Kate Spade & Co (NYSE: KATE) have recently been on a sobering drift lower.

An April 3 Reuters report suggesting Kate Spade's Board needed more time to negotiate a deal following a low-ball offer from Coach Inc (NYSE: COH) sent shares tumbling about 15 percent.

The decline in the stock price was furthered Tuesday after the company posted first-quarter results and said a review of strategic alternatives "is proceeding in a timely manner." The company's Board disclosed it has not yet set a definitive timetable for the completion of its review.

Kate Spade shares closed down more than 6 percent at $18.16.

The move lower Tuesday erased all of the gains since early February, when a takeover deal seemed imminent.

Investors in the stock who may be growing concerned, don't fret. There is at least one factor in Kate Spade currently offering some promise for a decent takeover premium: options activity.

So far in the 11 trading days of April, Benzinga Pro had alerted users to unusual and bullish option activity in Kate Spade contracts four times.

• On April 10: a call betting 50,000 shares at $0.32 that the stock will trade above $19.50 before May 23.
• On April 12: a call betting 100,000 shares at $0.50 that the stock will trade above $19.61 before April 20.
• On April 13: a call betting 200,000 shares at $1.148 that the stock will trade above $19.34 before May 20.
• On April 18: a call betting 115,000 shares at $1.051 that the stock will trade above $20.05.

Options can be a useful way to hedge against core portfolio stock holdings and can provide major leverage for short-term trades; They can also be extremely volatile and risky.

For traders that understand the risks associated with option trading, options can be a useful and profitable trading tool.

Elizabeth Balboa contributed to this report.