- The combination of earnings and back-to-school shopping makes August a historically bumpy month for retailers, according to Vishal Vivek of Goldman Sachs.
- This year, retailers face even more uncertainty because of questions about school openings during the pandemic and about the possibility of more economic relief from Congress.
- In spite of that, Vivek says the options market seems to expect less volatility than usual from many retailers that will report their earnings this month.
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Back-to-school season can be stressful in the best of years, and it turns out retailers feel the strain, too.
Volatility for US retail stocks spikes during the August thanks to the combination of back-to-school shopping and quarterly earnings, says Goldman Equity Derivatives Associate Vishal Vivek.
“The average stock in the XRT realizes 20% higher volatility in August relative to other months,” Vivek wrote in a note to clients, referring to the SPDR S&P Retail ETF.
To put it another way, he found that the volatility of those stocks in August over the last decade was double that of the average S&P 500 stock.
This year, that gap could be multiplied because of uncertainty over school openings, and questions about whether Congress will pass a new economic relief bill.
In spite of all that, Vivek says the options market is currently pricing in less volatility for most of these stocks than they’ve recently delivered when they’ve reported their earnings.
He writes that makes this a smart time to use an options-based strategy. The opportunity he’s focused on involves betting on greater-than-expected volatility by buying Sept-20 straddles, or puts and calls with the same strike price.
“We see potential for higher than usual volatility in these names over the next month, driven by broadly elevated expectations, and an uncertain macro environment,” he wrote.
With that in mind, these 24 companies are all set to report earnings in August. They’re arranged from lowest to highest based on the difference between the volatility the options market is currently pricing in for the day and the size of the stock’s earnings-day moves over the last eight quarters.
For almost all of them, there is a substantial gap, suggesting that the options market is underestimating how much they could move.
Vivek adds that earnings expectations look high for Kohl’s, Urban Outfitters, and Gap, while positioning on Dollar General, Macy’s, and Nordstrom is notably bearish relative to history and positioning on Target and Dollar Tree options is bullish.