Tapestry is a highly rated stock that was recently added to the SwingTrader product. Investors who think its shares will continue to rally and don't want to risk significant capital can use long call options rather than buy the stock outright.
Tapestry markets leather handbags and accessories for men and women via more than 1,400 stores worldwide. Its outlets include Coach stores, along with Kate Spade and Stuart Weitzman. It formerly went under the name of Coach.
Tapestry stock is up more than 19% over the last three months and within site of an all-time high at 90.85.
In early May, the company reported earnings per share of $1.03, easily surpassing analyst estimates of 88 cents. This was the fourth consecutive quarter of beating analyst views.
Using a call option on Tapestry stock can be a good way to efficiently deploy precious capital in these volatile markets.
A call option is a contract between a buyer and seller. The contract gives the buyer the right to purchase a stock at a certain strike price up until a given expiration date.
Less Exposure, More Leverage
One of the benefits of call options is that they provide leverage. This can be both a good and a bad thing.
Assuming an investor wanted to buy 100 shares of Tapestry stock, they would have to invest around $8,350 at the current price. Instead, the investor could gain a similar exposure using a fraction of the capital by buying a call option. One call option gives the investor exposure to 100 shares.
If an investor were to buy one Tapestry 85-strike call option expiring Aug. 15, they would only need to invest around $500 rather than $8,350. The break-even price for this call option is equal to the strike price plus the premium paid. That makes the break-even price 90.00.
The most the trade can lose is the premium paid of $500, which occurs if Tapestry finishes below 85 on Aug. 15. However, if Tapestry stock shoots higher, the upside is unlimited.
Using options in this way can be a great way to gain exposure to a stock without risking as much capital as would be required to buy the stock outright.
Tapestry Stock: Turning A Bull Call Spread
Savvy traders can further reduce the risk by selling an out-of-the-money call, turning the trade into a bull call spread.
For example, selling the Aug. 15, strike call at 95 would reduce the trade cost by around $160 to just $340. But that would also limit the upside above 95. A stop loss could be set if Tapestry drops 8% from the entry point.
According to IBD Stock Checkup, Tapestry stock ranks first in its group and has a Composite Rating of 96, an Earnings Per Share Rating of 96 and a Relative Strength Rating of 95.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a masters in applied finance and investment. He specializes in income trading using options, and is conservative in his style. He also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
