High Risk/Reward Trade: Short Retail (XRT, JWN, TIF, COH, URBN)

Retail stocks such as Coach (NYSE: COH), Nordstrom (NYSE: JWN), Tiffany (NYSE: TIF), and Urban Outfitters (NASDAQ: URBN), to name a few, have been on an absolute tear over the last month. The market as a whole also is starting to appear very overbought in the near term. I continue to be quite bullish on the market, but common sense would suggest that a pull back of some kind is likely in the near term. If you are looking to profit from a correction, look at retail stocks and ETFs to get the most bang for your buck.

Nordstrom (JWN) has gained over 16% in the last month alone. Tiffany (TIF) has surged 10.43% during this time, as well, and Urban Outfitters (URBN) has gone parabolic, climbing 18.84% over the last several weeks.

If we do indeed see a sell off this week, short term bearish options trades in these names could pay off handsomely. I would not go near the equity. There is simply too much momentum in these stocks to attempt to sell them short. Rather, consider buying puts outright, as volatility is fairly cheap right now, or consider implementing a limited risk/reward spread strategy using either puts or calls. A bearish call spread is entered by buying call options of a certain strike price and selling the same number of call options of lower strike price (in the money) on the same underlying security with the same expiration month. If the stock declines, the investor is able to pocket the difference between what he sold the more expensive option for and the premium he paid for the less expensive option.

This strategy can also be implemented using put contracts, by reversing the process. In addition, you can enter these positions in one transaction with your broker. The outlook for this trade is short term and fairly risky, but by using options, you will know exactly what your downside is prior to entry. In order to avoid specific stock risk, consider entering bearish options trades on the SPDR S&P Retail ETF (NYSE: XRT).