Monday Options Update: ROST, TGT, BJ, M, DIS & LTM

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Includes: BJ, DIS, LTM, M, ROST, TGT
by: Interactive Brokers

Rebecca Engmann Darst co-authored this article.

Ross Stores Inc.  (NASDAQ:ROST) – In early option trading on Monday several retail companies have shown a slight glimmer of hope despite a still downwards bias for share prices. Shares at Ross Stores are now higher at $26.42 while option traders have put into play a 20/25 put spread involving 3,000 lots at a net premium of 1.50. The trade is mildly bearish and would begin to make money for investors if shares settled below $23.50 at expiration. The maximum gain occurs if shares slip to the lower strike price or beyond at which point the biggest profit is 3.50 per contract. 

Target Inc. (TGT) – Same store sales volume slipped in the current quarter by 3.3% at stores open at least one year, which gives the impression that Target is losing market share to WalMart where volumes grew 2.2%. Today’s news that net income shrank by 24% didn’t please investors and shares are lower at $32.80. Investors played the scenario by deploying long put positions in the November contract, which expires this week. The greatest volume occurred at the 32.50 strike where put volume of 10,000 lots adds to investors' current outstanding positions of 11,202 contracts. At today’s 1.50 premium an investor buying puts would make money below a share price of $31.00. 

BJ’s Wholesale Club Inc. (NYSE:BJ) – Option volume of six times the average pricked our ears this morning. Shares have reversed earlier losses perhaps inspired by several bearish plays and stand at $34.93. Option traders used the November 30/35 put strikes and the 25/30 December strikes to deploy bearish trades with limited profit potential. Instead of buying puts outright they bought higher strikes to sell lower strikes. In the November example the net premium of 1.80 creates a profitable trade by the weekend should shares in the company close below $33.20 while maximum gains occur from $30.00 and below. In the December strikes the lower premium reflects the out-of-the-money status of the strikes employed today. The net premium of 1.10 creates a breakeven at expiration of $28.90 and a larger maximum gain of 3.90 per contract if shares fall to and below $25.00 in one month. 

Macys Inc. (NYSE:M) – Shares were better bid from the outset today appearing to take a cue from a bullish option play in which an investor sold more than 19,000 put options at the November 7.5 (ATM) line. Given there are less than 3,000 existing positions according to a reading of open interest, this is a new position. Given its size, one imagines that an investor has also taken an underlying position in the stock and stands prepared to take delivery of a position by expiration this week. Implied volatility on Macys options today stands at 129%. Investors could be taking a more optimistic stance on the shares given the fact that the company has announced earnings that were not too shabby but also said that it would slash capital expenditures. While we know for sure that the retail environment is dire, investors are likely hunting for well-run and lean companies, which is certainly a description that fits Macys. 

The Walt Disney Co. (NYSE:DIS) – A cut in one analyst’s rating from ‘buy’ to ‘hold’ saw shares in the theme park operator decline by 2.8% to $20.51. Option traders pounced on the news and placed a put spread involving the December 17.5/20 strike puts where the higher strike was bought 5,000 times while the 17.5 line was sold on identical volume. The net premium of 1.0 implies further downside potential for the shares to a breakeven reading of $19.00 by expiration. Meanwhile the investor wins should the share price fall by 14.7% from its trading level today as far as the lower strike price. 

Life Time Fitness Inc (NYSE:LTM) – A new 52-week low at $11.75 is possibly not a surprise for Midwestern gym and fitness provider, Life Time Fitness given the weak economy. The company also offers LifeSpa and LifeCafe nutritional food and beverage services, but one can understand the challenge of maintaining earnings momentum during the credit-crunch. Option volume of 14,700 contracts weighed in today as investors pounded the put-side of the screen with volume concentrated at the December contract at the 10.0 strike. However, the puts appear to have been sold at a 70 cent premium. It makes sense that some sharp investor was already short the stock waiting for this to happen and so might have been able to enhance the yield via a covered put play. If shares fall beneath the strike price and the stock is put to the investor he has no worries closing out the position at a profit. In addition the investor gets to keep the premium regardless.