IB Options Brief: SPDR S&P Retail ETF (XRT) & Fossil, Inc. (FOSL)

Posted May 8th, 2012 by Caitlin Duffy in Unusual Activity

XRT ñ SPDR S&P Retail ETF
Retail stocks may continue to sell off, by the looks of massive stakes taken in XRT put options this morning. Shares in the equal-weighted retail ETF are down 1.5% at $59.45 this afternoon as stocks across the board sink. The two largest trades in XRT options today are in the May $56 put, with a total of 55,000 contracts purchased in two blocks at a premium of $0.35 apiece.

The put trades could represent hedges to protect long exposure to the retail sector, or may be outright bearish bets that the pullback in the XRT is likely to continue through May expiration. Profits, or downside protection, is available on the position should shares in the ETF drop 6.4% to breach the effective breakeven price of $55.65. The XRT currently trades 11.35% higher than it did at the start of 2012, but had been up as much as 18.0% for the year as of last Monday.

FOSL ñ Fossil, Inc.
A ratio put spread initiated on watchmaker, Fossil, Inc., yesterday ahead of the Companyís first-quarter earnings report had the right idea, but underestimated the magnitude of the downside move in the stock. Fossil shares are down 37.25% to stand at $78.91 as of 1:05 pm ET after the Company lowered its full-year earnings forecast due to softness in Europe.

Bearish players expecting the selloff to continue picked up out-of-the-money puts in the front month. Contracts that were worth just pennies ahead of the report were today purchased at far heftier premiums. Traders positioning for shares to fall another 8.0 to 13.0% in the near term paid an average premium of $1.79 apiece for the May $75 strike put, and shelled out $1.26 per contract to get long the May $70 strike put.

The May $105/$120 one-by-two ratio put spread purchased at a premium of $2.00 per contract yesterday looked for maximum profits in the event of a roughly 18.0% decline in the shares to $105.00, however, shares in FOSL plunged straight through $105 and are now trading well below the effective lower breakeven share price of $92.00 implied by the ratio spread. As of today, the position appears to be a losing proposition even though the directional bet turned out to be spot on.

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