This year, the old saw is being parsed in ways that were hard to imagine even just a few years ago. Investors are becoming increasingly nuanced in how they approach Christmas as e-commerce has become so well developed that it has turned what was a relatively simple holiday trade into surgical wagers on the retail sector.
Companies with brisk online presences, particularly Amazon.com (AMZN), are prompting investors to position for outsize gains in December and January. Traditional retail—think any company that needs stores to sell—are becoming fodder for aggressive bets that those stocks will falter.
Investors are aggressively borrowing old-line retail stocks from brokers all over the Street, and then shorting those shares.
The same is happening for retail-themed exchange-traded funds that cover the entire sector. The trade simply expresses a view that so much business will shift to online retailers this month that it will sink the stocks of bricks-and-mortar retailers, enabling short sellers to buy back those stocks at sharply lower prices.
Short interest in a key proxy for the retail sector, the SPDR S&P Retail ETF (ticker: XRT), recently hit 441% of the fund’s available shares. This demonstrates the fevered frenzied among investors to bet that traditional retailers will have a bad Christmas.
The ETF’s top holdings include Hibbet Sports (HIBB), GameStop (GME), Tiffany (TIF), Murphy USA (MUSA), Sally Beauty Holdings (SBH), Lithia Motors (LAD), Best Buy (BBY), Carvana (CVNA), Dick’s Sporting Goods (DKS), and Stamps.com (STMP). Other holdings include Rite Aid (RAD) and Target (TGT),
If this investment thesis resonates, it’s not too late to trade the theme. Investors can buy XRT’s January $43 put for about 89 cents. If the put is at $40 at expiration, the put is worth $3. Should the fund price be above the put strike price at expiration, the trade fails.
Investors who are willing to wager a much larger sum of money can trade Amazon.com.
Investors with substantial cash positions can consider selling cash-secured puts. This expresses a view that Amazon’s stock will rally during the holiday season. Investors without loads of idle cash to use to securitize a put can buy Amazon’s upside calls to position for the stock to rally.
With Amazon’s stock at $1,776.14, investors can sell the January $1,700 put for $23.50. The January $1,800 call was recently trading around $43.60.
If the put is at above $1,700 at expiration, investors keep the put premium. The risk—and it cannot be overstated—is that the stock is below $1,700 at expiration. If that happens, investors must cover the put at a higher price, or buy the stock at $1,700—even if it is trading at $1,640.
Of course, the real rub to the cash-secured put sale is that investors must have $170,000 to set aside with their broker to sell the January $1,700 put.
Should that prove to be too expensive, investors can buy Amazon’s January $1,800 call. If the stock rallies off holiday sales data, and is say at $1,900 at expiration, the call is worth $100.
During the past 52 weeks, Amazon’s stock has ranged from $1,307 to $2,035.80.
To be sure, all of the retail trades are aggressive speculations that Scrooge would appreciate. Should the trades pay off, investors should pocket enough dosh to pay for all of their holiday presents, and then some.