Bets Against U.S. Retailers Double as Estimates Rise

Traders have doubled their bearish bets against U.S. retailers in the options market, speculating next month’s reports on sales and unemployment will disappoint investors after a record 12-week rally.

The ratio of puts to sell the SPDR S&P Retail exchange- traded fund versus calls to buy it has jumped to 4.1-to-1, close to the highest level since August, and put trading surged to a nine-month high on April 23. Wagers are most concentrated on contracts that pay off should the ETF fall 18 percent by May 21.

Derivatives traders are diverging from equity analysts, who have increased 2010 profit growth forecasts for the industry to 9.5 percent from 8.8 percent at the beginning of April, according to data compiled by Bloomberg. Reports next week may show sales at retailers slumped this month and the U.S. unemployment rate held at 9.7 percent, the International Council of Shopping Centers and economists said, while data released April 7 showed consumer credit shrank in February.

“Retailers face contracting credit, high unemployment and no real visible spending catalyst on the horizon,” said Kevin Nichols, vice president for ETF strategy at Newedge Group in New York. “The put-call ratio has doubled since the beginning of the year. That magnitude of increase usually marks a directional bet, more so than a hedge.”


By purchasing puts on the ETF, traders are betting against companies from Wal-Mart Stores Inc., the largest retailer, to online merchant Seattle-based Inc. and business- supplies seller Office Depot Inc. in Boca Raton, Florida. The 62-company security has risen 28 percent to a record $45.40 this year, or triple the gain by the Standard & Poor’s 500 Index.

Same-store sales at 31 U.S. retail chains rose 9 percent in March from a year ago and may be unchanged or decline 3 percent this month, the New York-based International Council of Shopping Centers said. Most chains report sales on May 6. While revenue increased in the first three months of this year, the gain came in comparison to a year earlier when the economy was in the depths of the worst recession since the 1930s.

The Labor Department’s May 7 report may show the U.S. unemployment rate is still near the 26-year high of 10.1 percent reached in October, according to the median estimate of 13 economists in a Bloomberg survey. Consumer credit fell by $11.5 billion in February, 16 times more than forecast and the 12th contraction in 13 months, the Federal Reserve said April 7.

12 Straight Weeks

The retailer ETF has risen 12 straight weeks. All but two stocks have advanced this year, led by rallies of at least 80 percent for Los Gatos, California-based Netflix Inc. and AnnTaylor Stores Corp. in New York.

David Schick, a retail analyst for Stifel Nicolaus & Co. in Baltimore, said that Americans are still wary of spending.

“You have to see jobs and a perception of jobs to continue to move in the right direction,” Schick said. “That could turn the easy comparison momentum into real momentum. It’s a long way from seeing that happen. It doesn’t mean it won’t. We just don’t know if that’s the outcome yet.”

Many U.S. retail chains report April sales at stores open at least a year on May 6. About 70 including Wal-Mart of Bentonville, Arkansas; Cincinnati-based Macy’s Inc., the second-largest U.S. department-store company; and Minneapolis-based Target Corp., the second-largest U.S. discount chain, report quarterly results during the two-week period that ends May 21, which is also the day that next month’s options expire.

Triple the Average

Options strategists including those at Susquehanna International Group LLP have noted higher-than-average volume for bearish options on the retail ETF since April 13, when put trading surged to 143,486 contracts, the most in almost three months. Put volume jumped to 99,441 on April 22 and 191,315 on April 23, triple the four-week average.

“The vast majority of recent SPDR S&P Retail flow has involved protective trading,” strategists at Susquehanna in Bala Cynwyd, Pennsylvania, wrote on April 23. Some of the largest trades were initiated by investors making bearish bets using options expiring in May, June and September, they said.

Outstanding put options have almost quadrupled this year to 879,982 contracts, while open interest for calls has nearly doubled to 217,232. Puts account for 18 of the ETF’s 20 largest levels of open interest.

May $37 puts are most widely owned, with 70,063 existing contracts, and their open interest has grown the fastest over the past two weeks, according to data compiled by Trade Alert LLC, a New York-based provider of options market analytics. The retail ETF hasn’t closed below $37 for two months and a decline to that level would be an 18 percent slide from the last close.

“I’ve been seeing institutions accumulate bearish positions,” said Frederic Ruffy, senior options strategist at, a New York-based provider of options-market analysis. “There’s going to be a lot of data in the first week of May.”

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