With retail stocks getting slammed today as result of poor results and guidance from Macy’s (M) I wanted to take the opportunity to update a bearish options trade detail here, and discussed on CNBC’s Options Action this past Friday May 6th, the S&P Retail etf (XRT) to isolate what I thought would be a slew of disappointing retail earnings results and forward guidance.
This is what I wrote at the time:
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.
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.
This is what I said on the program:
Here was the trade:
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.
As I write the XRT is trading $41.90, down 2.5% from the execution, and the June 42/38 put spread is worth about $1.10, or about a 35c gain.
At this point we have options. First we can leave it as is, we have it right where we want it with the stock at the long strike with 5 weeks to expiration. Or we might consider rolling up the short June 38 strike to possibly the June 40 puts. We could buy to close the June 38 put for 24 cents and sell to open the June 40 put at 60 cents. The roll would result in a 36 credit, and creating the June 42/40 put spread for 39 cents, currently worth 70 cents. So we would be reducing our premium at risk, but also reducing our maximum potential gain.
We’re going to see how the etf acts at this support level around 42 and if it breaks try to be as patient as possible before rolling. If it and the market holds we’ll probably do that roll to reduce risk. We’ll update on the site if we make a move.