Traders shop for a move in retail amid Trump meeting
02/16/17

Retail executives were busy meeting with President Trump yesterday, and now options traders are getting ready for quarterly reports.

Home-improvement chain Lowe’s (NYSE: LOW) led the charge, with a block of 12,000 April 80 calls (options to buy a security) purchased for $1.22. The contracts will more than double if LOW rallies just 7 percent to $83 by expiration. A 10 percent move in the underlying stock to $85 would result in even more leverage, returning about quadruple their initial outlay. A failure to move higher will render their entire investment worthless.

LOW earnings are due March 1, so Wednesday’s trader may be looking for a good set of numbers. LOW advanced 1.57 percent to $76.91 yesterday, and is up more than 8 percent so far this year.

Another trader targeted electronics chain Best Buy (NYSE: BBY), which reports on the same day. This time, it appears he or she sold an existing position in 7,318 February 46 calls for $0.30 and rolled into an equal number of March 47s for $1.84. That granted an additional month to profit from a potential rally. It cost an incremental $1.54 on top of whatever was paid for the 46s.  They also stand to lose their investment absent a sharp upside move.

The upside bets came as the U.S. Commerce Department sharply revised up its estimate for December retail-sales growth. The total for last month also beat estimates by a wide margin.

Most companies in the industry have struggled for months despite a strong economy and record highs for the S&P 500. Analysts have mostly attributed their underperformance to a holiday season when business increasingly shifted to the Internet. Department stores like Kohl’s (NYSE: KSS), plus mall-based sellers of apparel and accessories like L Brands (NYSE: LB) and Michael Kors (NYSE: KORS), have suffered significantly.

Costco (Nasdaq: COST) bucked the trend by luring shoppers with fresh foods. Traders nevertheless positioned for a drop in the warehouse giant yesterday by purchasing 3,500 3-March 172.50 puts for $1.88 and selling an equal number of 3-March 167.50 puts for $0.68. The so-called vertical spread uses income from selling one contract to lower expense and increase leverage. It cost $1.20 and will return 317 percent if COST closes below $167.50 on expiration. (Above $172.50, it becomes worthless.) Earnings are due the afternoon before expiration.

In summary, retailers are always the last major industry to announce results. Those upcoming headlines, combined with broad optimism about the economy, may focus attention back on the group.