Thursday, July 18th, 2019

Buying Calls on Retailers


Buying calls on retailers is looking attractive as last month’s sales were the best in over half a year. As the holiday shopping season gets into full swing retailers are offering the usual discounts to get shoppers into their stores. It appears to be paying off as companies such as JCPenny who reported an increase of third quarter profits by almost two thirds. In fact the increase in pre holiday season sales would seem to indicate that consumers are more comfortable with spending their money even through unemployment is still stuck in the ten percent range. Buying calls on the likes of JCPenny, Target, Wal-Mart, and the rest could be profitable if sales continue to go up. However, the trader will need to be wary about purchasing calls on stocks whose prices have already gone up. The market’s habit of discounting information could make buying calls on retailers an effort in futility if stock prices are already at what future sales will support. Always a concern in how to trade stock options is whether the trader is getting in before or after the market has discounted anticipated earnings. On the other hand, if the market discounts increasing sales, and sales don’t increase, buying puts instead of buying calls on retailers could be the profitable way to go.

In buying calls the trader does not incur an obligation to buy a stock. Rather he purchases to option to purchase if he so chooses. The important issue is timing. By the time retailers are reporting sales results it is too late to profit from options trading as the market will have discounted that information. Succeeding in options trading requires that the trader correctly anticipate the fundamentals that drive stock price as well as market sentiment about where a company’s fortunes are going next. Part of the analysis of where stock prices will go for retailers, hinges on economic forecasts for the economy at large. As employment and wages go up there is more money to spend and we can expect the Targets and Wal-Mart’s of the world to prosper. However, coupled with the good news of increased sales and profits at JCPenny is a report of a contraction in manufacturing in New York, New Jersey, and Connecticut by roughly 25% to a level indicating a contraction in this sector. Thus, even though sales are up there is always the possibility of economic contraction hitting the consumer’s pocketbook down the line. Buying calls on retailers in the short term could profit from holiday season sales and suffer from layoffs in the coming months. The trader will need to assess both factors as well as current stock prices before buying calls on retailers, especially those with major operation in the Northeast.

Uncertain economic times are commonly good times for trading options. The question is if puts or calls will be what make a profit. A long straddle options trading strategy can be profitable in a market situation where two opposing factors could take a stock price either up or down. The long straddle involves buying both puts and calls on the same stock with the same expiration date. The trader profits if the stock goes up in price or it goes down. He only loses if the stock price remains stable but only loses the price of two premiums. As usual we are not suggesting that the reader buy or sell the stocks in question nor that he trade options on them. The point is the exercise to go through when considering when to buy puts and calls.

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