OPTIONS REPORT: Sell Options In Retail Stocks, Says Goldman Sachs

Strategists at Goldman Sachs Group Inc. say traders can rake in yield by selling options in retail stocks ahead of the holidays.

Historically, October and November tend to be months during which retail stocks stage their sharpest moves. Much of the activity is driven by traders betting on whether the holiday shoppers can goose sector stocks higher and lower.

However, much of October and November's retail-stock choppiness abates with today's Black Friday, typically the biggest shopping day of the year, Goldman Sachs says. Calmer trading in sector stocks translates into lower options prices.

"November is typically a volatile month for retail, but December is one of the lowest," wrote Goldman Sachs derivatives strategists Katherine Fogertey, John Marshall and Amarnath Jha in a note this week.

"We believe that retail investors focus on the early holiday sales results around Black Friday, but stock volatility declines towards the end of the holiday season, when holiday sales trends are already widely known," they said.

As a stock's actual and implied volatilities decline, so do options prices. Therefore, Goldman Sachs's derivatives team wrote that investors can capitalize on presently elevated options prices by selling call options in select retail stocks. To garner yield, they recommended selling options in retail stocks least likely to be jostled by the holiday season.

In particular, Goldman Sachs recommended that investors sell options in women's apparel maker Chico's FAS Inc. (CHS), handbag maker Coach Inc. (COH), upscale retailer Nordstrom Inc. (JWN), home-furnishing retailer Williams-Sonoma Inc. (WSM) and department store operator J.C. Penney Co. Inc. (JCP).

For each stock, options prices are high considering that 16 years of Goldman's data suggest relatively muted moves. Additionally, the strategists said that none of these companies face pending catalysts, like earnings, that are likely to send the stocks sharply higher or lower.

"Volatility consistently declines in December for consumer stocks, as investors have already decided the trajectory of holiday spending from early indicators such as Black Friday," said the strategists.

The idea is to bring in yield by selling relatively pricey call options. For example, Goldman Sachs advises that clients sell $34-strike J.C. Penney calls that expire Jan. 20.

Investors would collect 60 cents per contract sold at Friday's close, according to FactSet. Traders could keep that money should the J.C. Penney's stock linger below $34 over the next two months.

Shares of J.C. Penney fell 24 cents, or 0.8%, to close at $29.64 Friday. The stock last closed at or above $34 on Oct. 24.

Call options allow the holder to buy options for a set price by a fixed expiration date. Investors who sell call options could be on the hook to sell shares of J.C. Penney for the exercise price should the stock push higher before the call options expire.

-By Chris Dieterich, Dow Jones Newswires; 212-416-2611; [e-mail]