I have a really weird theory about the retail sector: specialty retail might be more of a leading indicator than a lagging indicator … at least for guys. Here is my theory: When the average woman has extra spending money she buys shoes, hand bags, new jeans, a nice dress … clothes. Option trading fans take that as you will.
Guys on the other hand like to buy toys. Universally, all men like gadgets like TVs, phones, and PlayStations. Urban dwellers may join boxing gyms or train for triathlons. Those less urban or wishing to be less urban will get boating or hunting equipment. As the economy heats up, men will have to buy boats to put at new lake properties or ocean properties in Florida, Michigan, Tennessee, and elsewhere.
The point of this is not to go on some sort of misogynistic rant but to explain why I am starting to get bullish on Dick’s Sporting Goods (NYSE: DKS). The specialty retailer is in the perfect position to do well as the economy improves. The store is loaded with toys that can suit urban or suburban men.
On the company level, most of the stores are in great locations. They are carrying great brands at a good price point. They carry every shoe one can imagine, have a full line of fishing equipment, and they have a rock climbing wall (I just think that is kind of cool).
Anecdotally, one of the best ways to tell if a retail chain is doing well is to walk into one. The last time I walked into a Dick’s the store was packed. Speaking to others they have seen the same thing. I think the company is in a good position to have a great quarter. It is scheduled to release earnings on March 8.
The options themselves do not trade that often, but the paper I see has been call buying. This has led to a nice increase in implied volatility (IV). At this point I think calls might be a little too juicy to buy but I think the company is going to do well, though not Blow It Out of the Water great. With earnings coming up, I think a put spread makes a lot of sense.
The best spread — based on IV — on the board right now is the DKS March 37/35 Put Spread with a goal of selling it at 70 cents to 75 cents. That is, sell the DKS March 37 Put and buy the DKS March 35 Put. If one were to buy calls the DKS March 38 Calls for 75 cents to 80 cents are probably the best value right now.
Follow Mark Sebastian on Twitter @optionpit.
