Option Bears Target Nosediving SPDR S&P Retail ETF (XRT)

The SPDR S&P Retail ETF (XRT) is getting crushed as retail stocks sell off

Josh Selway
May 11, 2016 at 1:18 PM
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The SPDR S&P Retail ETF (XRT) is getting pummeled today, as retail stocks sell off following a number of poorly received earnings reports. With today's trading volume landing in the 99th percentile of its annual range, the exchange-traded fund (ETF) has given back 3.5% at $42.14, on pace for its lowest close since Feb. 22. The drop brings XRT's 12-month loss to 14.5%, yet options traders are bracing for extended losses from the retail ETF. 

XRT put options are trading at nearly three times the average intraday pace, outpacing calls by a more than 3-to-1 margin. The most popular XRT option by far is the June 41 put, with the May 42 put coming in at a distant second. It's likely traders are buying to open positions at these strikes, anticipating further losses from the retail ETF over the next several weeks. 

This put-buying spree is not an anomaly, either. In fact, the ETF's 50-day put/call volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) comes in at 2.98, meaning roughly three long puts have been initiated for every call over the past 10 weeks.

Further illustrating this put-skew is XRT's front-month gamma-weighted Schaeffer's put/call open interest ratio (SOIR) of 4.55. This tells us that near-the-money puts more than quadruple calls among options residing in the monthly May series. 

Interestingly, now is an opportune time to purchase premium on XRT's near-term options. Its Schaeffer's Volatility Index (SVI) of 21% sits just 2 percentage points from a 12-month low. This tells us the options market is pricing in relatively low short-term volatility expectations for the ETF -- even with a number of retailers gearing up to report earnings this week and retail sales set for release on Friday.

Plenty of short sellers have targeted XRT, too. At the ETF's average daily trading pace, it would take shorts almost six sessions to cover their bearish positions. On the other hand, short interest on the SPDR S&P Retail ETF (XRT) fell by 20.5% in the latest reporting period. 

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