It’s unlikely you’re a mall rat in this age of e-commerce shopping, but despite the high-profile death of Sears (NASDAQ:SHLD), two brick-and-mortar shops actually have figured out how to compete in this environment. These retail stocks are Foot Locker (NYSE:FL) and Ulta Beauty Salon (NASDAQ:ULTA).
With both retailers finding their own stride on the price charts to compliment attractive fundamentals, it’s time for a pair of bullish options strategies on FL stock and ULTA stock. Let me explain.
Foot Locker (FL)
It’s not easy to compete as a brick-and-mortar retailer these days. But Foot Locker appears to be finding a way to beat the odds and the likes of Amazon.com (NASDAQ:AMZN) by making a visit to their storefront a customer experience that’s hard to replicate with the click of a mouse.
Bottom line, as a strategic partner for a rebounding Nike (NYSE:NKE) and major channel supplier for Adidas (OTCMKT:ADDYY), Foot Locker is ground zero for cool sneakers and the kind of hands-on expertise many customers need to get into the right shoe.
The combination is paying off with back-to-back, better-than-expected earnings reports. Yet shares remain undervalued and have trailed the retail sector this year by a wide margin. Many investors continue to fear a shift to online and direct-to-consumer channels by Foot Locker’s top brands will eventually sack FL stock once and for all.
I’d personally have to respect the bearish short interest in excess of 11.50% if FL stock breaks below $45 and a couple percent below the September pivot. But given Foot Locker’s technical situation, under-performance and valuation, a stronger move toward channel resistance of $62.50 to $65 certainly looks possible.
Reviewing FL stock’s options, a long January $55/$62.50 call vertical is favored. With shares of Foot Locker fetching $49.70, the spread is priced for $1.60. The cost limits downside exposure to just over 3% of owning FL in the event shares are sacked.
On the other foot and if we’re right, a reassertion of the uptrend above the $52.50 area should quickly put this FL spread in-the-money.
The max payoff of $5.90 occurs above $62.50 in FL stock at expiration. This spread has smartly sold some premium to offset the long call at the lower end of our noted resistance area. Personally, I’d look to make some type of profitable adjustment near $55 to ensure pricier merchandise doesn’t get stolen away down the road.
Ulta Salon Inc (ULTA)
Ulta Salon is known for its brick and mortar presence and ‘attending to clients’ beauty and health needs, face-to-face. The company’s “high-low” and hands-on approach continues to work in a crowded market with its loyal base of consumers furthering that commitment with their dollars and buying into Ulta Beauty’s interactive online shopping experience as well.
The strategy does come with a cost in the form of thinner margins these days. Still in the face of continued competition from drugstores like Walgreen’s (NYSE:WBA) and CVS (NYSE:CVS), and of course Amazon; ULTA stock has nevertheless continued to grow its sales and bottom-line.
Now and following a slightly deep 40% correction, ULTA stock has enjoyed a bullish uptrend or cup-with-handle makeover. And with shares just finishing a test of former price and Fibonacci resistance for support; it’s time to shop for a bit of long exposure in ULTA.
Reviewing this retail stock’s options and because of ULTA’s still-promising growth, I’m more open to positioning with a modified fence strategy. The combination’s embedded put credit spread increases downside exposure, but helps finance the bull call spread which the trader wants to go in-the-money.
One favored spread of this type is buying the January $300 / $310 call vertical and selling the January $250 / $240 put spread. With shares at $275.64 the position is priced for a very small debit of 25 cents.
A move back towards ULTA stock’s pre-correction all-time-high of $314.86 would put the call spread entirely in-the-money. With a November earnings catalyst, healthy technical platform and the combination allowing for an additional couple months of life after the event; that could add up to new highs and profits of $9.75.
Alternatively, if a blemish on our uptrend appears and ULTA’s recent lows fail to hold, this modified fence has you covered. At the end of the day this spread offers a margin of safety in excess of 9% before an almost too small to mention debit becomes a potentially more sizable, but well-managed $10.25 loss within a slightly less attractive, but still pretty uptrend.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
