The retail rout could soon be over.
That's at least according to the options market, which saw an uptick in bullish activity in the SPDR S&P Retail ETF on Wednesday as traders bet the market's worst-performing sector this year could turn around.
"[The] XRT actually traded well over 10 times its average daily call volume today, and on low volume for the options market, that's a particular standout," Mike Khouw, co-founder and chief strategist at Optimize Advisors, said Wednesday on CNBC's "Options Action."
The most active call options, or bullish traders, were purchases of the $40 strike calls expiring on Sept. 6, Khouw said. One trader bought 20,000 of those calls for 25 cents each in a bet that the XRT could rise 2% by the end of next week, a move that was playing out in early Thursday trading as the ETF climbed about 1%
"That's a short-term bullish bet trying to take advantage of the fact that options look very fairly priced here, a bullish bet for one of the sectors that hasn't performed all that well this year," Khouw said of the ETF, which has lost more than 2% so far in 2019.
"With the volatility we're seeing and options prices not being up as much as we might otherwise think that they should be, that's probably why we're seeing [investors] use that to make their short-term bullish bets here," Khouw said.
Steve Grasso, managing director of institutional trading at Stuart Frankel, said he'd prefer to pick and choose retail stocks rather than buying a basket.
"Wouldn't you think that the worst is over for a lot of these retail names?" he said in the same "Options Action" segment. "I always use this argument that it's not priced in until it's priced in, but I would think that there's a heck of a lot of headwinds that have already been established ... in the retail space. But stick with the winners. Stick with the raw stars. Stick with the T.J. Maxxes. Stick with the Walmarts. Stick with the Costcos. Don't go into the deep end of the pool on names that have not performed well."
The XRT was trading just below the $40 level early in Thursday's session.