Bargain hunt in fleet- footed retailer
06/02/17

Is it time to shop for bargains in the retail space? Some traders seem to think so.

The sector-tracking S&P Retail Select Index is down 6 percent so far this year, badly lagging the broader market’s 8.5 percent gain during the same period. Experts blame the weakness on a terrible holiday-shopping season as business shifted to the Internet, prompting a wave of store closures in response.1

Shoe merchant Skechers USA (NYSE: SKX) has gotten walked on along with the rest of the industry, but yesterday it seemed to have some spring in its step following an upgrade by Citi. Bullish options activity was also detected about two hours into the session as traders bought 5,000 June 26 calls for $0.75. They sold matching numbers of the June 25 calls for $1.23 and the June 28 calls for $0.15.

Here’s what appears to be going on:

  • Owning calls fix the price where investors can purchase a security, so they can make money when shares run higher. In this case, they have a right to buy SKX for $26 over the next two weeks – no matter how high it may go.
  • They apparently sold the June 28 calls in a new transaction. That obligates them to deliver SKX for $28 if it breaks through that level. (Don’t forget they will have bought the stock $2 lower because they've got the 26s.)
  • It looks like they previously owned the 25 calls, and exited at a profit after the stock ran higher. That let them collect a net $0.63 – the $1.23 and $0.15 received minus the $0.75 they paid.
  • Their new position will earn an additional $2 if SKX closes at $28 or higher on expiration, but expire worthless if the stock closes below $26. 
  • For traders who know their lingo, they rolled a winning bet into a vertical spread. It looks like they’re playing with "house money" in hopes of further upside... just like we saw recently in Vodafone (NASDAQ: VOD).
Skechers USA (SKX) 6-month chart

Source: OptionsHouse by E*TRADE

SKX rose 2.74 percent to $26.22 yesterday and has mostly drifted sideways for more than a year. But traders with a longer memory recall its fleet-footed days of ascending more than 1,000 percent between early 2012 and late 2015.

Analysts are starting to think it’s ready to start moving again. Citi, for instance, likes the company’s transition towards wholesale channels, and away from ailing storefronts.2 Cowen made a similar argument on March 24, also citing its international growth potential.3 Susquehanna said on April 10 that all the bad news was priced in. B. Riley upped the shares to buy on April 21.4

Chart watchers have also noticed that the stock’s 50-day moving average is back above its 200-day MA, which is sometimes viewed as a potentially bullish reversal signal.

Bottom line: Retail has been out of favor all year, but some traders seem to think SKX will pull away from the pack.

 

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1. NPR: Retailers Scrambling To Adjust To Changing Consumer Habits. 5/2/17.

2. Marketwatch: Skechers upgraded on improved wholesale performance. 6/1/17.

3. TheStreet.com: Skechers Stock Jumping on Cowen Upgrade. 3/24/17.

4. Benzinga.com: Susquehanna Upgrades Skechers USA to Neutral. 4/10/17. 3. Benzinga.com: B. Riley Upgrades Skechers USA to Buy. 4/21/17.