$XRT Retail Roll

by Dan May 6, 2016 2:10 pm • Commentary• Trade Ideas

While about 70% of S&P 500 companies having reported Q1 earnings, the balance of high profile names yet to report will be heavily dominated by retailers like Costco (COST), The Home Depot (HD), Lowe’s (LOW), Macy’s (M), Target (TGT) & Walmart (WMT).  The retail oriented results that we have seen so far have been mixed, but the price action overall has been less than stellar, with prior leaders like Nike (NKE), Under Armour (UA) & Starbucks (SBUX) all down considerably since their earnings reports.  

Last Friday, we highlighted WMT’s poor performance (here), amidst the company’s hope that low oil prices finally becoming a tailwind for investors. But the problem is that economic conditions (as evidenced by this morning’s April Jobs report, the lowest print since last September) appear to be weakening, with consumer confidence waning a bit. This is during a time when crude oil has remained bid, with gas at the pump up more than 10% since most retailers gave guidance in February.  So the expected tailwind could become a headwind at the exact wrong time.

Nearly two months ago we expressed a bearish view of the retail sector, using the S&P Retail etf, the XRT (here) when the etf was trading $44.65.  Here was the trade from March 10th:  [private]

XRT ($44.65) Buy the June 45/38 put spread for $2
  • Buy 1 June 45 put for $2.40
  • Sell 1 June 38 put at 40 cents

Now with the etf at $43 ($2 in the money) the put spread is worth $2.45. Following this recent weakness we now want to roll the 45 cent profit to a lower strike put spread that we think offers a better risk reward.  Think of it this way, despite the existing trade having a very higher probability of success because the put spread is in the money, we are risking more than we were 2 months ago, with far less time for the trade to play out.  We think it makes sense to reduce the premium at risk while targeting a similar spot to the downside from the original trade.

But it is important to note that the new trade has a lower probability of success because the long strike is now out of the money, but in my mind the risk reward is more favorable and we take some overall premium risk off the table


  • Sell to close XRT ($43) June 45 put at $2.60 and
  • Buy to open XRT ($43) June 42 put for $0.95
New Position: Long XRT ($43) June 42/38 put spread for 65 cents (currently worth .80 mark to market)

Break-Even on June expiration:

Profits: between $41.45 and 38 of up to $3.35, max gain of $3.35 at $38 (or below)

Losses: up to 65 cents between 41.35 and 42, with max loss of 65 cents at 42 or higher.

Rationale: I am playing for continued near term weakness, now targeting a breakdown below $42 support, with a range back towards the Jan/Feb double bottom low.:

[caption id="attachment_63460" align="aligncenter" width="600"]XRT 1yr chart from Bloomberg XRT 1yr chart from Bloomberg[/caption]

This roll doesn’t “book” profits but it takes the current profits from the in the money put spread and uses them to stay in the position for essentially no risk while being there for any further downside in the retailers over the next month and a half, particularly with a lot of retail components.