Update: Retail Me Not – XRT

by Dan October 11, 2018 12:02 pm • Trade Updates

On September 27th I made the case that retail stocks were facing a more challenging environment into Q3 earnings after an epic run since the group bottomed last summer (Retail Therapy):

I suspect if we were to see a drop off in consumer confidence, that AMZN give their value proposition with Prime will have their sales hold up much better than those who are seeing the fruits of their omnichannel investments over the last few years. I would also suggest that it is worth looking a bit under the hood on the confidence front as there has been housing and auto data that suggests that consumers are pushing out larger purchases. And it is also worth noting that U.S. auto stocks and homebuilders are seeing their share prices get destroyed, with stocks like General Motors (GM) / Ford (F) and Lennar (LEN) and Toll Brothers (TOL) are trading at new 52 week lows while the S&P 500 (SPX) is trading at new all-time highs.

So we could be at peak consumer confidence, with weakening auto and housing data, oil prices nearing 52-week highs with the backdrop of a brewing trade war with our allies and adversaries alike which is likely to lower consumer purchasing power. Retail companies (aside from AMZN) may face very difficult comparisons as we head into the all-important Q4 Holiday selling season.

Given what I thought was a precarious technical set-up, I detailed the following bearish trade idea in the etf that tracks the space, the XRT, when it was $51.30:

XRT ($51.30) BUY NOV 51 / 47 PUT SPREAD FOR 90 CENTS
-Buy to open 1 Nov 51 put for $1.15

-Sell to open 1 Nov 47 puts at 25 cents

Break-even on Nov expiration:

Profits of up to 3.10 between 50.10 and 47, with max gain of 3.10 at 47 or lower.

Losses of up to 90 cents between 50.10 and 51 with max loss of 90 cents above 51

Now with the XRT at just above the short put strike of the spread it makes sense to take the gains and not risk the profits waiting to get the full width of the spread as the etf went right where I wanted it too.

Action: XRT ($47.30) Sell to close Nov 51/47 put spread at $2.60 for a $1.70 gain

-Selling to close 1 Nov 51 put at $4

-Buying to close 1 Nov 47 put for $1.40

Rationale: the $4 wide spread can only be worth $4 on Nov expiration. with the trade nearly a double after less than 3 weeks, and five weeks to expiration, it does not make sense to stay long it. It would make sense to roll some of the profits to a new put spread if you thought the group is going lower.

If I were to roll with the XRT at $47.30 I might consider buying the Nov 47 / 44 put spread for 90 cents.  this way I would be rolling the original premium that I risked, locking in the 80 cents gains and keeping a bearish view.

After the technical breakdown below $48, $44 is the next target to the downside: