OPTIONS REPORT: Sell Options In Retail Stocks, Says Goldman Sachs
November 25 2011 - 2:12PM
Dow Jones News
Strategists at Goldman Sachs Group Inc. say traders can rake in
yield by selling options in retail stocks ahead of the
holidays.
Historically, October and November tend to be months during
which retail stocks stage their sharpest moves. Much of the
activity is driven by traders betting on whether the holiday
shoppers can goose sector stocks higher and lower.
However, much of October and November's retail-stock choppiness
abates with today's Black Friday, typically the biggest shopping
day of the year, Goldman Sachs says. Calmer trading in sector
stocks translates into lower options prices.
"November is typically a volatile month for retail, but December
is one of the lowest," wrote Goldman Sachs derivatives strategists
Katherine Fogertey, John Marshall and Amarnath Jha in a note this
week.
"We believe that retail investors focus on the early holiday
sales results around Black Friday, but stock volatility declines
towards the end of the holiday season, when holiday sales trends
are already widely known," they said.
As a stock's actual and implied volatilities decline, so do
options prices. Therefore, Goldman Sachs's derivatives team wrote
that investors can capitalize on presently elevated options prices
by selling call options in select retail stocks. To garner yield,
they recommended selling options in retail stocks least likely to
be jostled by the holiday season.
In particular, Goldman Sachs recommended that investors sell
options in women's apparel maker Chico's FAS Inc. (CHS), handbag
maker Coach Inc. (COH), upscale retailer Nordstrom Inc. (JWN),
home-furnishing retailer Williams-Sonoma Inc. (WSM) and department
store operator J.C. Penney Co. Inc. (JCP).
For each stock, options prices are high considering that 16
years of Goldman's data suggest relatively muted moves.
Additionally, the strategists said that none of these companies
face pending catalysts, like earnings, that are likely to send the
stocks sharply higher or lower.
"Volatility consistently declines in December for consumer
stocks, as investors have already decided the trajectory of holiday
spending from early indicators such as Black Friday," said the
strategists.
The idea is to bring in yield by selling relatively pricey call
options. For example, Goldman Sachs advises that clients sell
$34-strike J.C. Penney calls that expire Jan. 20.
Investors would collect 60 cents per contract sold at Friday's
close, according to FactSet. Traders could keep that money should
the J.C. Penney's stock linger below $34 over the next two
months.
Shares of J.C. Penney fell 24 cents, or 0.8%, to close at $29.64
Friday. The stock last closed at or above $34 on Oct. 24.
Call options allow the holder to buy options for a set price by
a fixed expiration date. Investors who sell call options could be
on the hook to sell shares of J.C. Penney for the exercise price
should the stock push higher before the call options expire.
-By Chris Dieterich, Dow Jones Newswires; 212-416-2611;
christopher.dieterich@dowjones.com
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