Each day we review lots of data – from stock activity to options trading, we pour through information, market data, filings, and our own proprietary models looking for anomalies, common threads, and developing themes. Our clients gain invaluable insight from our perspectives, in which we are able to construct strategies and build ideas that are usually unique. By scrubbing data, looking into news developments, and searching out these themes, we do not only find one idea but sometimes several opportunities within an industry group or sector.
Competitors, suppliers, and customer relationships can also be beneficiaries of what happens from one company to another. For example, when a company receives a contract it often will subcontract out to others, which helps to spread the wealth. Understanding those relationships can be profitable for would-be investors. For technical analysts looking at relationships between stocks and ETFs, which may not only identify such opportunities, but because the relationship occurs in the market place it may be more timely for traders and investors.
Last Thursday we noted the development of a theme: Options activity increased, along with a rise in options premiums, in the retail sector. When we did some further work, we noted that this phenomenon was concentrated in lower priced retail stocks, such as Radio Shack (RSH) and Office Depot (ODP). We also noted an increase in activity and options prices for Abercrombie & Fitch (ANF). All three have been in negative trends, with RSH setting a new all-time low, ODP declining to an eight-month low, and ANF setting a two-month low. What was interesting is that while lows were being set, ODP and RSH had positive options flow.
As we looked further into the trading and stories, we noted a rise in speculation for RSH, which is looking to close stores but are negotiating with their bankers, seeking approval, before moving forward with the plan. While the stock was lower on concerns about such an agreement, buyers were purchasing call options, speculating that a deal would be reached shortly.
While the three stocks mentioned above saw their implied volatility (derived from options premiums) levels rise, the SPDR S&P Retail ETF (XRT) saw its risk premiums drop. So, the rise in premiums for our aforementioned companies is an anomaly within the sector. These are some of the ideas that we seek out.
Scott H. Fullman is chartered market technician ofOlympian Group of Investment Management based in Ft Lauderdale with offices in New York. He offers research and alpha strategies at his newly launchedIncreasing Alpha.
The opinions expressed in this Commentary do not reflect the editors ofTradersor its parent company Sourcemedia.
