Retail Earnings Driving Options Trades This Week

Includes: JCP, JWN, M, RTH, URBN, WMT
by: Joe Kunkle

Retailers saw a lot of options action Wednesday after Macy's (NYSE:M) fell 8% after reporting quarterly results, and Wal-Mart (NYSE:WMT) announced it expects a difficult holiday shopping season. The names with the action will all report earnings this week, including JC Penney (NYSE:JCP), Wal-Mart and Nordstrom (NYSE:JWN).

JC Penney's puts are active ahead of 11/13 earnings after Macy's shares got hit on earnings, a close competitor. At 11:46 am, 3,000 December $28 puts were bought and 3,000 December $27 puts were sold in an apparent bearish spread. But there was also a trade of 3,000 December $30 puts at $0.90, below the bid. Shares broek down intraday and the action looks bearish in the options pits. 4X average put volume has traded already.

Nordstrom is trading 11,555 calls and 17,246 puts ahead of Thursday night's earnings, around 4X average put volume and 2X call volume. The most notable action was with the closing of November $35 call positions earlier. But now another large bearish trade hits with a ratio put spread buyer in December, as the trader buys 3,000 December $35 puts and sells 6,000 December $32 puts for a 15 cent debit in a trade that is bearish on both price and the 49% implied volatility.

Wal-Mart will report earnings before the open Thursday morning and is a key market mover as a great indicator of where the economy is and where it is heading. Shares were a bit higher Wednesday despite making cautious comments and 53,500 calls have traded and 12,700 puts, nearly 2X average call volume although a good deal is in selling calls. The largest trade was early Wednesday morning at 9:45 am, with a trader selling 5,000 December $55 calls in a buy-write strategy, looking for shares to head a bit higher this year. There are also a lot of closing trades in the November $52.50 calls.

The best read from this is that option traders are positioning more positive for Wal-Mart as compared to the more pricey retailers, which is good for Wal-Mart, but could be a discouraging sign for how far along we are in an economic recovery.

Another trend to watch is that many of these retailers jumped on same store sales figures in November, and gave fairly strong guidance, so the reaction to the actual numbers have down as the path of least resistance, with much of the optimism already baked in. It is also worth noting that Wal-Mart no longer reports same store sales, so it may have the best chance to surprise investors, and hence the bullish activity.

Urban Outfitters (NASDAQ:URBN) will also report earnings this week and is seeing mixed activity today, although recent positioning has had a bullish bias.

Disclosure: Own Ratio Put Spread in JWN