Retail stocks have had it rough this quarter, as several disappointing third-quarter earnings reports sparked concerns about changing consumer demand. The retail tracking ETF XRT has fallen more than 5 percent this month while the broader market has seen incremental gains.
But Goldman Sachs says that with a crucial holiday season ahead, it actually looks like investors aren't nervous enough.
"For many stocks in the retail sector, the options market is pricing in that the issues that plagued retail in November abate in December and beyond," Katherine Fogertey and John Marshall of Goldman Sachs wrote on Wednesday. "We think that this is overly conservative considering the potential for shares to realize big moves around holiday demand and ICR in January," referring to the investment conference held by advisory firm ICR.
To take advantage of this apparent complacency, Goldman is recommending straddles, which bet on big swings in either direction by buying both a call and put at the same strike price and expiration date. Included in Goldman's shopping list are Decker's, Dollar Tree, Nordstrom, Kohl's, Macy's, PVH, Ralph Lauren and VF Corp.
But some traders say there are better ways to play retail stocks going into the holidays.
Read More Target, Wal-Mart see slower online sales
Stacey Gilbert, head of derivative strategy at Susquehanna, said she would not recommend buying several straddles, unless traders are targeting a specific event or direction of price movement.
"In general, I do not like that type of strategy," Gilbert said Wednesday on "Trading Nation." "The market's saying it's going to be about as volatile as it has ever been over the last two years. So when buying a straddle I really think you have to have an event that you're looking at, and an expectation for a move."
Within retail, Gilbert said she's seen notable activity in Decker's and Dollar Tree, both of which could see a rebound in the next couple months. Gilbert said Decker's is trading at a discount compared with analyst price targets, and options are looking cheaper than the rest of the retail space.
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"If you look at the relative pricing of November options versus December options in Decker, the Novembers are through the roof," Todd Gordon of TradingAnalysis.com said Wednesday. "Compare that to December, they're actually not that expensive, to Goldman's point."
However, "I'm a little concerned on Goldman's call of buying blanket straddles going out into December," he said, agreeing with Gilbert.
In order to take advantage of the relatively cheaper options in December, Gordon recommends pursuing a different option strategy known as a "calendar" on shares of Decker's. That entails selling the more expensive November call options and buying December call options to create a bullish trade.
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