Retail ETF Offers Options at a Bargain

The XRT exchange-traded fund (ETF) just suffered its worst week in months

May 15, 2017 at 12:48 PM
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Abysmal earnings out of the retail sector weighed on the stock market last week, and one exchange-traded fund (ETF) was especially hard-hit: the SPDR S&P Retail ETF (XRT). XRT shares are now testing their mettle near a noteworthy Fibonacci retracement level, and will remain in focus this week, as more retailer earnings pour in. Below, we'll discuss levels to watch for XRT, and why now is a good time to buy short-term options on the ETF.

XRT Shares Test Familiar Support

The SPDR S&P Retail ETF last week gave up 2.9%, marking its worst week since late March. Since peaking at $48.26 in early December, XRT shares have dropped roughly 12%. The ETF was last seen in recovery mode, up 0.9% at $42.50, after bouncing from multi-layered support. Specifically, the round-number $40 level has emerged as a lifeline for XRT since early 2016, and represents a 23.6% Fibonacci retracement of the security's rally from its all-time lows in November 2008 to its all-time high in March 2015. Meanwhile, the May 40 put is home to roughly 16,400 contracts -- the second most-populated strike in the soon-to-expire series -- which could serve as an added layer of short-term support this week.

retail etf xrt chart today

XRT Options Traders Expect a Bounce

Options traders today are betting on an extended bounce for XRT, with calls trading at three times the average intraday pace, and volume headed for the 98th percentile of its annual range. Roughly 18,000 XRT calls have changed hands so far, with potential buy-to-open action spotted at the weekly 5/26 43-strike call -- most active today -- and the May 42.50 call.

Call open interest is already much higher than normal on the retail ETF. Currently, XRT sports nearly 164,000 calls outstanding -- higher than 92% of all other readings from the past year. On an absolute basis, though, XRT puts are more popular, with close to 183,000 contracts -- in the middling 57th percentile of its annual range.

XRT Options a Bargain Right Now

As alluded to earlier, it's a good time to be a short-term buyer of XRT options. The ETF's Schaeffer's Volatility Index (SVI) of 19% is higher than just 3% of all other readings from the past 12 months, indicating XRT's near-term contracts are attractively priced right now, from a historical volatility standpoint.

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