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This morning, I am recommending a bearish trade on the SPDR S&P Retail ETF (NYSEARCA:XRT).
I couldn’t make up my mind about the retail sector in early April. I had some bullish exposure in the form of a put write on Capri Holdings Limited (NYSE:CPRI), but luxury retailers seemed to be performing better than the rest of the sector.
Ultimately, I put on a bearish trade as downside insurance, and I was glad I did. The sector struggled a little in April, and I was able to take profits. Now, I’d like to do it again.
The escalating trade conflict is going to make thing difficult for large retailers. Often, U.S. retailers have exposure to China through their supply chains, and multinational brands see China as a growth market. I wouldn’t be surprised if, like the broader market, XRT struggled in the short term because of the recent tariff increases.
Bullish News From Macy’s Won’t Change Much
In my recommendation yesterday, I noted that any positive earnings from CSCO wouldn’t change much about the market environment the company was operating in. This morning, Macy’s (NYSE:M), an important retail stock to be sure, reported strong earnings for the first quarter of 2019.
That news could be bullish for the broader retail sector, and XRT was up in premarket trading, though it dropped after the market opened.
Like I said yesterday, earnings are an indication of past performance. Stocks that report strong earnings, like M, will be better prepared to weather the short-term problems caused by the recent trade developments, but they won’t be immune to the effects.
XRT Dropped Below its Support Just Above $43
XRT broke below the support it established in early 2019. Now that it has crossed that level, it could head down to retest its December 2018 lows. XRT also dropped below its 50-day moving average, which could provide more resistance in the near term.
Daily Chart of SPDR S&P Retail ETF (XRT) — Chart Source: TradingView
XRT is an ETF, which means it moves slower than most stocks. If it does retest its lows from December, it will likely take some time, making it a good target for a downside insurance play. We should have plenty of time to take profits if the stock falls.
I think the retail sector will struggle with the recent trade developments, and any bullish earnings from larger retails stocks could give investors a reason to lock in profits and seek more defensive investments elsewhere. For that reason, I’m recommending a bearish put debit spread on XRT this morning.
Using a spread order, buy to open the XRT June 21st $40 put and sell to open the XRT June 21st $39 put for a net debit of about $0.15.
Note: There are several June expirations available for XRT options. Be sure you are opening the monthly options that expire on Friday, June 21, 2019.
About Ratio Put Debit Spreads
A debit spread is simply a way to lower the cost of buying options, as the option that you sell to open (short) helps offset the cost of the option that you buy to open. Therefore, this put debit spread is a way to lower the cost of buying bearish put options. Many brokers will require the use of margin and/or a set amount of reserved capital to execute a debit spread; contact your broker directly for specific requirements.
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Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.