At the risk of sounding like a broken record: the retail sector had a good run throughout the last few months, but it’s overheated and a pullback is imminent. Yesterday, we got that pullback after same-store sales were announced. But one investor was bucking the trend and has become bullish on Limited Brands (NYSE: LTD, Stock Forum).
Looking at the July 12.5 puts, around 11:20 a.m. EDT, an investor sold 7,000 contracts at 95 cents per contract with the stock trading around $12.63, making these puts slightly out-of-the-money. These puts are home to open interest of 246, implying that yesterday's trades were sold to open and will translate as new open interest today. It’s noteworthy that out of the approximate 39,000 options traded in LTD, more than 11,300 of them were July 12.5 puts. Normal daily volume in LTD options is around 29,000.
The bullish investor in question is calling a bottom in LTD shares, and needs LTD stock to close higher than $11.55 (the strike plus minus the premium collected for the puts) come July expiration to retain any of this premium. LTD shares dropped 37 cents to $12.76 in afternoon trading. LTD stock rallied more than 100% since reaching a 52-week low on March 6 when these shares sank to $6.26.
The investor made a bullish bet despite worse-than-expected same store sales numbers released. Retail store openings fell 7%, which missed average analysts’ estimates by about 4.5%, compared to the 1.1% gain last year. In addition, same-store sales at Columbus, Ohio-based LTD took a 7% nosedive in May, matching analysts' estimates. But a glimmer of hope exists in consumer confidence, which beat analysts' estimates and climbed to 68.7 in May. This investor could be selling these puts on a bet that retail stocks will continue to rally as consumer confidence improves.The investor could also be thinking that LTD simply doesn't have farther to fall in the short term.
I’ve written several articles that encourage caution in retail stocks. Wednesday, an investor bought more than 8,200 Nov. 30 puts in J.C. Penney (JCP). On May 14, I wrote about a put-buying activity in the SPDR Retail ETFs (XRT), as one investor showed bearish sentiment ahead of several retail earnings reports. On May 12, I also outlined specific strategies to use for retail stocks to protect against the sector’s run-up over since March. But at least one investor seems to be confident in taking on more risk in the retail sector using this LTD put sell.
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