$XRT – Retail Therapy

by Dan May 6, 2016 4:15 pm • Commentary• Trade Ideas

Earlier, we posted an update our existing XRT trader (here), but since I’ll be discussing this trade on CNBC’s Options Action tonight I want to have a separate post isolating the new strikes without the profits of the previous trade and the roll:


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.  I fully expect HD to do what they, more doing if you get my drift, but JCP’s results today suggest that department stores are getting eating alive by the likes of Amazon.com , and this is a secular shift that retailers of all sorts will spend untold amounts of millions to create omni-channel offerings, which hurt profitability in the near term. I suspect 2016 will be a tough year for retailers, as was 2015.

This is just the world we live in.

Last Friday, we highlighted WMT’s poor daily performance (here), and considered their upcoming earnings event, 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.

While I have been bearishly positioned in the XRT for a couple months (here), targeting a move back to $40 looks like reasonable risk reward with defined risk:

Trade: Buy XRT ($43) June 42/38 put spread for 75 cents
  • Buy 1 June 42 put for 90 cents
  • Sell 1 June 38 put at 15 cents

Break-Even on June expiration:

Profits: between $41.25 and 38 of up to $3.25, max gain of $3.25 at $38 (or below)

Losses: up to 75 cents between 41.25 and 42, with max loss of 75 cents at 42 or higher.

Rationale: Despite the stock being down 6% in the last week, given the catalysts of retail earnings in the next few weeks, playing for continued near term weakness, targeting a breakdown below $42 support, with a range back towards the Jan/Feb double bottom low makes sense given my financial world view.

XRT 1yr chart from Bloomberg
XRT 1yr chart from Bloomberg