Retail stocks, badly beaten up last year are showing fairly decent relative strength so far in 2016, with the XRT, the S&P Retail etf down only 2.5% vs the S&P 500 (SPX) down 5.5% on the year. Additionally, the XRT is up 12.5% from its recent 52 week lows made earlier this month vs the SPX up about 7%.
At least one investor is looking the other way today, possibly as a hedge in a basket of retail stocks. When the XRT was $42.16 (shortly before noon) a trader bought to open 10,000 of the April 41 puts paying $1.17 to open, and sold 20,000 April 39 puts at 61 cents. This trade is a 1×2 ratio put spread, and was executed for a 5 cent credit.
If the XRT is between 41 and 39 on the trader can make up to $2.05, the width of the put spread plus the 5 cent credit received, with the max gain at $39. The payout trails off between $39 and $37, with losses below $37.
A look at the year to date chart shows obvious support near $38:
As regular readers know, we don’t place too much emphasis on unusual activity, especially when you consider the trade that I just detailed, which is essentially flat deltas, meaning at current levels it has little directional bias, unless the etf were to move closer to the long strike, and will not act like a pure hedge until very near expiration if the etf is near the long put strike.
I would also add that almost two hours before the ratio spread was bought, a block of 20,000 XRT April 40 puts traded, they printed on the bid, suggesting that they were sold. But again, its very hard to tell, as the initiating side could have been a buyer, and the market maker taking the other side, who would have been selling the puts, would also have needed to sell nearly 700,000 shares of stock to hedge the position, and by the time the block of options was actually printed, the previously agreed upon price on the options might have looked like a sale, as it was on the bid.
Anyway you dice it though, put activity has clearly picked up in the XRT, likely due to the sector’s out-performance, and it looks like some investors are looking at the recent bounce to slap on zero cost protection, or like the entry for a premium sale.