XRT Options Volume Rises Amid Retail Slump

The retail sector is getting crushed, after ANF abandoned buyout discussions

Jul 10, 2017 at 2:32 PM
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Abercrombie & Fitch's decision to walk away from M&A discussions is delivering a crushing blow to the retail sector today. In fact, the bottom performers on the S&P 500 Index (SPX) are almost exclusively retail stocks, with share of Macy's and Gap both touching fresh lows. Best Buy is also getting hit, amid news Amazon is rolling out a service to rival the company's Geek Squad. This all has resulted in steep losses -- and accelerated options volume -- for the SPDR S&P Retail ETF (XRT)

The exchange-traded fund (ETF) was last seen 1.9% lower at $38.95 -- nearing its June 21 annual low of $38.65. Year-to-date, XRT has dropped 11.6%, and appears to be on pace for its first monthly close below $40 since January 2014. Options traders don't appear too bullish today, either. 

XRT calls are trading at 1.6 times the expected intraday rate, with the August 41 call receiving the most attention. Sell-to-open activity looks likely here, meaning speculators are betting on the retail ETF holding below $41 through the close on Friday, Aug. 18, when the back-month contracts expire. 

Further down the list is the August 37 put, where new positions are being initiated. While it's not entirely clear whether this activity is buying or selling, anyone purchasing to open the contracts is betting on XRT extending its downside in the weeks ahead. Conversely, put writers would be betting on the strike to serve as near-term support. 

Coming into today, options data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) suggests traders have been speculating on an upside move from the ETF. For example, XRT has a 10-day call/put volume ratio of 0.96 across these exchanges, which ranks in the 75th annual percentile. In other words, call buying has been more popular than normal, relative to put buying. 

Either way, it's seemingly a good time to buy options on XRT. This is according to the fund's Schaeffer's Volatility Index (SVI) of 17%, which ranks in the low 19th annual percentile. Said differently, near-term options are relatively cheap, from a volatility perspective. Nevertheless, total option open interest on the retail ETF ranks in just the 12 percentile of its annual range, with just 160,869 contracts outstanding. 

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