Looking for a fun Christmas gift? Perhaps you should consider stuffing some stockings with options on retail stocks.
In a note released this week, Goldman Sachs' options research team opined that "there are significant catalysts for many retail stocks — including high uncertainty around Holiday selling season, preannouncement season for the sector and the ICR XChange Industry conference in January."
Yet despite this, "the options market is pricing in a decline in volatility for many stocks into January," the team led by Katherine Fogertey and John Marshall wrote.
In other words, options appear to be too cheap. Which, of course, would be a reason to buy them.
Rather than simply buying calls to express a bullish thesis, or puts to express a bearish one, the Goldman team suggests doing both by buying straddles. This is a structure that entails buying both a put and a call with striking prices in line with the stock's current price. If a stocks moves more than the options market is expecting, a long straddle will turn a profit.
Specifically, Fogertey and Marshall suggest buying January-expiring straddles on shares of eBay, Under Armour, Nike and Kroger.
Yet Dennis Davitt, a longtime options trader now with Harvest Volatility Management, says that there's a reason the options market is pointing to reduced volatility for retail stocks. Many have seen big spikes in volatility recently. For instance, Under Armour tanked in late October following its earnings report, and Ebay did the same.
More generally, the prices of options have dropped across the board lately, now that the much-anticipated presidential election has fallen in into the rearview mirror.
"Options are beneficial to buy before periods of volatility when people are not looking at high historical yields," Davitt said Thursday on CNBC's "Trading Nation."
"So it's kind of like, the hurricane has just passed, and now you want to buy insurance on it," he added. "The options were priced for a volatile time, and now they're fairly priced."
