Is the Retail Sector for Sale?

Stocks are off to a muted start this year as the record highs and so-so earnings reports are at loggerheads.  For all the Iron Condor traders, the market is finally being nice to them and that could be the position for 2014.  If the first 3 weeks is any indication, trade will be of the slow and steady variety with a good catalyst needed to really get things going one way or the other.

What has already gone bad in 2014 is the retail sector.  I have organized the OptionVision Landscape by the average 1 week performance.  The retail group is the second worst performing sector after the homebuilders as the market flirts with records.  After some disappointing Christmas results, many of the brick and mortar retailers got killed.

When the herd starts to not like something, they tend to do it for a while and then the herd mentality stops.  The retail sector is looking like that now and the only question is how long is it going to keep dropping back.  Note how large the drops were in the affected stocks.  Those kinds of drops cannot go on forever but can weigh on the group for a while.

Instead of focusing on one stock, an idea would be to trade the retail ETF, XRT.  The implied volatility is very low, even as many of the names are imploding.

The Trade:

Buying  a skewed strangle where you own the ATM put and OTM call in a longer time frame will give run on the downside until the market decides that retailers will be around for a while.  If you agree with this outlook, see if the March 83 strike put and March 84 call would be the skewed strangle to buy.  Should the correction in this sector continue, the put should finance the call for the trip the other way.   MS