Short Sellers, Options Traders Gear for More Volatility in Retail Stocks

By Gunjan Banerji Features Dow Jones Newswires

Short sellers and options traders are betting on more turbulence for the struggling American retail sector.

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U.S. retailers are shuttering stores at the fastest pace in more than a decade. A wave of bankruptcies has hit the group, and an exchange-traded fund tracking major retailers has declined 7% in 2017.

The stresses have pushed investors to yank about $120 million from the SPDR S&P Retail ETF in the last month, according to flow data from FactSet.

Now, option traders are pricing in big swings for heavyweights like Macy's Inc. and J.C. Penney Co. Both have shed about a third of their market values this year.

Options traders are betting on a 13.4% one-day move in shares of J.C. Penney after the company's earnings on Friday -- a move that is greater than the average 8.5% after the past eight releases, Trade Alert data show.

J.C. Penney's stock "is sitting near long-term lows, and some traders are shopping for another drop," wrote David Russell, Chicago-based senior manager at brokerage E*Trade Financial Corp. in a note on the options activity ahead of the retailer's report. J.C. Penney shares hit a record low of $4.33 this year.

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Options activity on major retailers such as Macy's and Nordstrom Inc. has also turned bearish, he said in an interview.

For Macy's, which reports on Thursday, traders project a 9.0% move, slightly under the average 9.6% swing after the last eight earnings releases, the data show.

The estimates don't indicate which direction shares might sway, just the magnitude of the move. The percentages are based on a trade called a "straddle," which entails buying puts and calls at the same level, called a "strike" price.

As earnings from some of the biggest U.S. retailers ramp up, investors are shorting or betting against the companies more heavily than other stocks within the S&P 500 index, data from research firm IHS Markit show.

Investors have also increased bearish options bets on the SPDR S&P Retail ETF, or XRT. The number of bearish put options outstanding has increased by 25% since the beginning of April, while the number of calls, or bullish options, has fallen by 26% over the same time period, data from Trade Alert show. Investors can use options to make directional bets or hedge existing holdings.

Earnings seasons have become crucial for stock performance, spurring greater volatility than in prior years, according to Goldman Sachs Group Inc. data. For many sectors, over 30% of quarterly returns stemmed from earnings week itself, the firm wrote in a July report.

Still, others may be positioning for a rebound. Mr. Russell said that traders have been scooping up call options on Target Corp. recently. The company's shares have fallen 19% this year.

"It looks like traders are hedging, or maybe even looking for a bounce," Mr. Russell said.

Write to Gunjan Banerji at Gunjan.Banerji@wsj.com

(END) Dow Jones Newswires

August 09, 2017 05:44 ET (09:44 GMT)