Short-term options are flying off the shelves for the equities
Goldman Sachs weighed in on retail stocks Ralph Lauren Corp (NYSE:RL) and Levi Strauss & Co. (NYSE:LEVI), downgrading the equities to "sell" from "neutral." The brokerage firm cited inventory overhangs, due to "persistently tough first-half retail trends and an optimistic spring ordering season," and is particularly concerned for apparel brands "with high exposure to department stores" ahead of the back-to-school season. Against this backdrop, RL and LEVI shares are swimming in red ink, and options are flying off the shelves.
Ralph Lauren stock is down 3.7% at $111. Since a post-earnings bear gap in mid-May, the security has been relatively range-bound, with the $116-$118 region emerging as a ceiling. This area is also where RL was trading before a February bull gap, and is home to the stock's descending 160-day moving average.
At last check, RL has seen roughly 2,100 calls and 1,600 puts change hands -- six times the average intraday volume. The weekly 8/2 series accounts for the top three most active options, with a three-legged spread apparently opened by one cautiously bullish trader.
Specifically, it looks like the investor bought to open 275 weekly 8/2 115-strike calls for $2.55 apiece, and then helped fund the position by selling to open the weekly 8/2 120-strike calls for $1.10 each. Then, to fund the bull call spread even more, the trader sold to open an equal amount of weekly 8/2 102-strike puts for $1.47 each. As such, the three-way spread was established for a net credit of $0.02 per trio of options ([$1.47 + $1.10] - $2.55).
The investor can pocket that credit as long as RL stays above the sold put strike of $102, and their profits will increase the higher the shares move above $115 (bought call strike) before the close on Friday, Aug. 2, when the options expire. However, no matter how high RL should move above $120, the trader's maximum reward is capped at $5.02 (difference between call strikes + net credit), due to the sold 120-strike calls.
Levi Strauss shares, meanwhile, are down 6.1% at $18.60, and just touched an all-time low of $18.48. The equity is on pace for its fifth loss in six sessions, with the sell-off triggered by a poorly received earnings report last Wednesday, July 10. Still, since going public back in March, the stock has managed to stay atop its initial public offering (IPO) price of $17.
Levi options traders are active today, especially on the put side. So far, the security has seen around 2,300 puts cross the tape -- four times the average intraday put volume. For comparison, about 1,500 LEVI calls have traded, representing twice the normal activity.
The July 19 strike is most active, with about 450 puts and calls traded. Buyers of the puts expect LEVI to extend today's slide south of $19 through the end of the week, before the options expire. Meanwhile, it appears traders are selling to open the 19-strike calls, and they'll retain the entire premium received from the sale, as long as LEVI shares remain below $19 through Friday's close.
Despite the security's struggles of late, Goldman's "sell" rating is the first of its kind for LEVI. Currently, the equity boasts four "strong buys" and two lukewarm "hold" opinions, and the consensus 12-month price target of $24.67 represents a premium of 33% to current levels, and sits in uncharted territory. Additional downgrades or price-target cuts -- Goldman trimmed its target on LEVI to a Street-low $19 -- could exacerbate selling pressure on the denim concern.