Options Trader Turns Defensive as Retail Stocks Surge

XRT options volume is trading at four times the intraday average

Nov 17, 2017 at 1:48 PM
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It's a big day for retail stocks, with positive earnings reactions for Gap Inc (NYSE:GPS) and Foot Locker, Inc. (NYSE:FL) -- and an impressive public trading debut for Stitch Fix Inc (NASDAQ:SFIX) -- helping to drive the upside action. Most recently, the SPDR S&P Retail ETF (XRT) was up 2.7% to trade at $41.69, but one options trader is taking a defensive stance on the retail sector ahead of the upcoming Black Friday and Cyber Monday sales events.

Taking a quick step back, 36,010 puts and 9,842 calls have changed hands on XRT, four times what's typically seen and volume pacing in the 97th annual percentile. The bulk of this activity can be traced to one options trader who, according to Trade-Alert, initiated a put ratio spread by selling 20,000 December 39 puts for $0.21 apiece and simultaneously buying 10,000 December 41 puts at $0.67 each, creating an initial cash outlay of $250,000 ($0.25 net debit paid per spread * 10,000 contracts * 100 share per contract).

Ideally, XRT will settle right at $39 at expiration at the close on Friday, Dec. 15, allowing the options trader to pocket the maximum potential reward of $1.75 per spread (difference between the two strikes, less the net debit). Should XRT close above $41, risk is limited to the initial premium paid. However, a drop below $39 could result in steep losses, considering one of the sold puts is uncovered.

Looking at the charts, the exchange-traded fund (ETF) dipped its toes below $39 as recently as last week, but has since surged 7.8% -- and is on track for its second straight weekly win. Plus, XRT shares are now trading north of a trendline that's connected a series of lower highs since the fund's early December annual high of $48.26.

 

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