Time for Rethink on Discount Retail?

Broad market action yesterday suggested that big-box retailer Wal-Mart (WMT) would breeze through the quarter on ever-hastening consumer retrenchments, continued demand for bargains, and its own aggressive offer to cash government tax-rebate checks to traffic from other discounters in the retail space. But it was a cautious forecast today – delivered with a sober warning on the impact of high gasoline prices on customer traffic to Wal-Mart's sprawling store locations - that sent its share price lower, even despite relative strength in this morning's retail sales number.

Maybe these discount retailers aren't in the catbird seat after all. We wonder if the newly circumspect rethink on the space is to blame for sudden wave of defensiveness in option activity of Dollar Tree (DLTR), the discount variety store chain whose locations and clientele dovetail nicely with Wal-Mart's, but whose merchandise is sold for $1 – a great price point for an ailing economy, but not so much for customers shelling out $4 per gallon of gas to get to the parking lot.

Shares are down .70% at $35.25, and while the company isn't due to report earnings until late May, we observed an increase in option trading activity to some 4.5 times the normal level. This appeared to involve bearish ratio put spreads at the 32.50 and 35 strikes, with a trader selling twice as many June 32.50 puts for (appropriately enough) $1 apiece in order to buy puts at the 35 strike for $2.10. The strategy implies limited downside from current levels following its earnings report on May 28.

Comments

[jerico]

Wal-Mart was being cautious and conservative in its outlook for the 2nd quarter. The market reaction was a classic "sell on the news" move, nothing more. Smart money has made 20% profit on this stock in the last few months. Smart money should buy on the dips, because a disproportionate share of those rebate checks are going to be spent for food and other such staples. Wal-Mart and Sam's clubs are the place to stretch those dollars. If we take a look at 22% growth in the international business, we have a pretty positive kicker. This is another easy 20% upside to this stock by September 08.

[montag]

Anyone who looks at option activity to guess which way a stock is going might as well be reading tea leaves. Option strike volume tells you nothing. You have absolutely no information what the option traders are doing in the underlying. Are they buying naked puts? Puts and stock? Which are calls by the way. Referencing option activity is the new blogger gimmick of the moment, it allows that extra bit of doom that bloggers think help drive up story hits.