Bears go shopping with retail ETF

By David Russell,

Shutterstock photo

Retail stocks are falling along with the rest of the market, and one big investor is positioning for more downside using a sector ETF.

XRT Chart optionMONSTER's Depth Charge tracking system detected the purchase of 27,000 August 37 puts on the SPDR S&P 500 Retail ( XRT ) exchange-traded fund for $0.64. The trader then sold 54,000 August 36 puts for $0.32. Given the greater number of puts sold, the transaction cost nothing to implement aside from commissions.

The XRT is down 2.1 percent to $37.31 in afternoon trading. The fund, which owns stakes in companies including Netflix and Foot Locker, has been flattening out in the last two months after a sharp selloff in late April and May.

Today's option trade, known as a bearish ratio spread, will earn a maximum profit of $2.7 million if XRT closes at $36 on expiration. The profits will diminish below that level and turn to losses if the fund breaks through $35.

The strategy is a common hedging tool by investors who want to hedge a long position in the stock against declines.

The transaction was the second largest to appear on our systems today, and pushed total option volume in XRT to triple the average level. Puts accounted for a bearish 97 percent of the activity, according to the Depth Charge.

(Chart courtesy of tradeMONSTER)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.

This article appears in: Investing Options
Referenced Stocks: FL , NFLX , XRT

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