Options Bears Blast XRT Ahead of Retail Earnings

A bevy of retailers will report earnings over the next several weeks

May 10, 2018 at 12:37 PM
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Wall Street is about to get hit with an onslaught of retail earnings in the next few weeks, drawing options traders to the SPDR S&P Retail ETF (XRT). Given the retail sector's recent struggles, most of the activity on the exchange-traded fund (ETF) appears to be of the bearish variety.

Today, for instance, though volume is still lighter than usual, puts outpace calls by a 15-to-1 ratio. Most of the action has centered at the weekly 5/25 45-strike put, due to a 1,500-contract block that was apparently bought to open for an initial cash outlay of $109,500 (number of contracts * $0.73 premium paid * 100 shares per contract).

This is the most the put buyer stands to lose, should XRT settle north of $45 at the close on Friday, May 25 -- when the options expire. Breakeven for the options trader at expiration is $44.27 (strike less premium paid), a 1.9% drop from the fund's current perch.

Echoing this skeptical stance, the stock's May 43 and 45 puts are home to peak front-month open interest, and data from the major options exchanges suggests these strikes were used to initiate a long put spread back in mid-April and again at the end of the month. If this is the case, the goal is for XRT to settle right at $43 at next Friday's close.

This region served as a floor in early December and early April, and roughly corresponds with a 61.8% Fibonacci retracement of the fund's November through January surge. It's also home to XRT's 200-day moving average, which served as resistance through most of 2017, but could now emerge as support on a potential pullback. And just above here is the ETF's 140-day trendline, which has served as a floor during the fund's recent channel of higher lows.

xrt etf daily price chart on may 10

That said, XRT is currently in its most bearish two-month stretch of the year. According to data from Schaeffer's Quantitative Analyst Chris Prybal, the fund has averaged a May loss of 0.7% since its inception, and a negative 2.2% return in June -- historically, its worst month of the year. At last check, XRT was down 0.2% at $45.12 to trade just below its year-to-date breakeven mark.

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