Option Traders Making Aggressive Plays In Retail Sector

Retail stocks were getting hammered on Wednesday, with the SPDR S&P 500 Retail XRT down 1.7 percent. The heavy selling in retail stocks triggered several unusual option trades in the retail space.

The Trades

On Wednesday morning at around 8:30 a.m., Benzinga Pro subscribers were alerted to a bearish sale of 11,987 Target Corporation TGT call options at an $85 strike price that expire on June 21. The calls were sold at the bid price of 18 cents and represent a $215,766 bearish bet that Target will not be trading above $85.18 within a month’s time.

Shortly thereafter, a second option trader made a pair of trades in American Eagle Outfitters AEO. The trader purchased 1,082 of the same American Eagle call options with a $19 trike price expiring on June 21. The buyer paid the ask price of $1.25, a $135,250 bullish bet. The trader then sold 836 June 21 American Eagle call options at a $21 strike price at the bid price of 82.4 cents. This second trade represented a $68,886 bearish bet against American Eagle.

Finally, at around 11:30 a.m., a trader sold 20,203 Macy’s Inc M put options at an $19.50 strike price that expire on June 21. The calls were sold at the bid price of 21 cents and represent a $424,263 bullish bet that Macy’s will still be trading above $19.29 a month from now.

Options Insight

Even traders that focus exclusively on the stock market watch the options market closely to gain insight into what option traders may be thinking. Due to the relative complexity of the options market, options traders are generally seen as more sophisticated than the typical stock trader. Large options traders are often institutions or wealthy individuals that may have a unique perspective and/or advanced information on a given stock.

Retail Earnings Volatility

The mixed option trading in retail stocks this week reflects what has so far been a mixed earnings season for retail stocks. The wild swings in retail stocks and the large options trades are indicative of how difficult it is for traders to navigate the struggling retail sector in 2019.

Target shares soared 9 percent Wednesday after the company beat earnings expectations, yet the large option trader appeared to be taking profits on his bullish bet.

With American Eagle shares already down 21 percent in May, those two trades appear to represent bullish-but-tempered expectations for the company’s earnings report, expected out on the morning of June 5.

Macy’s shares are mostly flat since the company reported an earnings beat and in-line first-quarter revenue on May 15. Wednesday’s trader seems to believe Macy’s will continue to be immune to the broad retail sector sell-off in coming weeks.

Unfortunately, there’s no way to be 100 percent certain whether the buys are a standalone position or a hedge against a larger stock holding. Given all of Wednesday’s trades mentioned above were under $500,000 in size, they are unlikely to be hedged in this instance.

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