Talking Derivatives With A Street Analyst

MKM Partners issued a derivatives strategy Monday ahead of retail earnings report.

Analyst Jim Strugger noted that approximately 50 constituents of the S&P 500 have yet to report Q1 earnings and 18 retailers will announce results through the first week of June within the consumer discretionary sector.

Those stocks were listed chronologically in the table below according to earnings date and with the spread between implied and realized post-earnings moves colorized, according to the firm's research.
 

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Strugger noted that “an interesting development” had been seen in the bias for investors to use the broader Consumer Discretionary SPDR (ETF) XLY at the expense of the Select Sector Financial Slct Str SPDR Fd XLF.

“XLY total options open interest bottomed below 100k in September last year before rebounding to above 500k Friday, while XRT open interest is languishing near historical lows around 80k,” Strugger said.

Of XLY's top 10 constituents, only Lowe's Companies, Inc. LOW had not yet reported Q1 2015 results (the company reports May 20).

“Though we have had a broadly cautious equity market view over the last few weeks, a fresh SPX breakout would likely have to include the retail leadership and broader consumer discretionary universe,” in Strugger’s view.

The analyst noted that the XLY 3- month at-the-money implied volatility was at 14.6 percent and was is in the 44th percentile relative to both the previous one- and two-year periods.

“In September expiry 79 strike 36^ or 80 strike 30^ calls can be bought right around that implied volatility level for $1.67 and $1.30, respectively, and we like either to position for potential upside over the next few months,” Strugger concluded.

The Consumer Discretionary SPDR (ETF) closed at $76.26 Monday, down 0.44 percent.