Bank Some Holiday Cash With Retail Options

by Tyler Craig | November 28, 2012 9:07 am

With the holiday season upon us and Black Friday and Cyber Monday still fresh in the minds of investors, many are taking a renewed look at potential plays in the retail sector. The working theory of the optimist might go something like this: “The irrepressible American consumer will shop like mad and deliver better-than-expected profits for retailers across the board.”

But before plunging headfirst into the retail sector, let’s take a look at whether recent price behavior merits a bullish play.

XRT -- Performance vs. Other SPDRs
Click to Enlarge

The chart at right displays the performance of a variety of sectors and industries relative to the S&P 500 over the past month. The top two performers have been the Consumer Discretionary SPDR (NYSE:XLY[1]) and (perhaps not surprisingly) the Retail SPDR (NYSE:XRT[2]), one of the key industries within the consumer discretionary sector. Top holdings within the XRT include Walmart (NYSE:WMT[3]), Amazon (NASDAQ:AMZN[4]) and Target (NYSE:TGT[5]).

The outperformance of retail over the past month confirms that Wall Street indeed agrees with the rosy outlook for retailers. Provided money continues to rotate into the sector, the retail space may be a good place to be heading into year-end.

XRT -- Daily
Click to Enlarge

Traders looking for a high-probability way to bet that XRT will stay slightly bullish into year-end could sell the December 61 put for $0.80 or better. By selling a slightly out-of-the-money put option, you can still profit even if XRT trades sideways over the next month. The max reward is limited to the initial $0.80 received and will be captured provided XRT remains above $61. To reduce the risk, you could buy back the put if XRT falls beneath support at $60.

At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.

  1. XLY:
  2. XRT:
  3. WMT:
  4. AMZN:
  5. TGT:

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