Option Plays Ahead of Retail Earnings

With retail company earnings reports around the corner, it’s time to check into potentially profitable option plays surrounding these reports. Last Thursday, Lynn Franco, director of The Conference Board Consumer Research Center said:

“Consumer Confidence was virtually unchanged in April, following a modest decline in March. As was the case last month, the slight dip was prompted by a moderation in consumers’ short-term outlook, while their assessment of current conditions continued to improve. Overall, consumers are more upbeat about the state of the economy, but they remain cautiously optimistic.”

That explains somewhat why we’ve seen retail stocks do well this year, especially in the luxury category. In this economy, I’m a fan of sticking with the high-end players as wealthy people continue to spend, and with the lower-end retailers that sell consumer staples.

On the low end, I’d definitely look at buying calls for Wal-Mart (NYSE:WMT) in anticipation of strong earnings. The May 60 calls are going for 45 cents, and with shares at $59, it’s entirely possible the stock will jump strongly on good earnings. There’s also a safe play in Target (NYSE:TGT) by selling in-the-money May 57.5 calls, with the stock around $58, for $1.23. That’s a 1.5% return for two-and-a-half weeks, or 30% annualized.

Costco (NASDAQ:COST) is a great stock to use options on, particularly covered calls. If you get stuck with the stock, well, there are worse companies to be holding. Otherwise, if you buy the stock at $87, and sell the June 87.5 calls for $1.65, you’re looking at the potential for a 2.5% return for a six-week holding period, or a 22% annualized return.

Looking at the higher-end plays, Michael Kors (NASDAQ:KORS) is still doing very well and growing strongly. Because it’s pricey on an absolute and relative basis, I’d prefer either buying the stock at $48 and selling the June 49 calls for $1.31, for a 2.4% return over six weeks, or a 21% annualized return. You could also buy the calls outright because a big earnings beat often translates into a multipoint gain in retail stocks.

You can also play Nordstrom (NYSE:JWN) by buying the May 57.5 calls for 68 cents if you anticipate blowout earnings. Or you can play it safer by buying the stock at $55.86 and selling the May 55 calls for $1.92, or a 1.9% return, or 38% annualized.

J.C. Penney (NYSE:JCP) could go either way as it negotiates a high-profile turnaround with a new store concept and a mega-investment from Bill Ackman. I like the company’s prospects over the long term, so this is a perfect opportunity to play with naked puts. You can earn money if the stock is not put to you, and if it is, it’s put to you at a reasonable long-term price. The premiums are great right now, so I’d sell the May 35 puts for $1.05, or a 3% return.

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.


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