Everyone knows the holiday season creates loads of good deals for consumers. But stock traders are also presented with money-making opportunities — they just have to know where to look.
That’s where Goldman Sachs comes in. The firm sees the annual shopping holiday known as Black Friday whipping up volatility in retail stocks, and has some ideas how traders can profit from those price swings.
Before we get into those specific recommendations, let’s
take a minute to quantify how important Black Friday and the overall
holiday season are to the bottom lines of retailers — and explain why
this year is particularly compelling.
Goldman estimates that one-third of annual retail sales come
in the fourth quarter. The firm says that over the past three years,
November and December have been three-to-four times more important for
retail stock returns than the other 10 months of the year.
Further, Goldman’s analysts forecast that nearly 35% of
yearly revenue for retailers will come this holiday season, the biggest
share since the fourth quarter of 2007.
“Black Friday has marked a key catalyst for the sector
historically as many investors use it as a gauge for the remaining
holiday demand,” Katherine Fogertey and the Goldman derivatives team
wrote in a client note. “While we acknowledge that Black Friday has
become less important (rise of Cyber Monday, store closures, online
shopping opportunities), we still see potential for turnout data to move
the sector — even more than the options market is pricing in.”
Without further ado, as Black Friday approaches, here are
three single-stock trades put forth by Goldman that can help you make a
1) Buy Ulta Beauty straddles for earnings and holiday demand
Trade: Buy monthly Ulta Beauty
straddles expiring in January 2018, with a strike price of $200. (Note:
A straddle involves the purchase of both call and put contracts, and is
used to play a big move in either direction.)
Rationale: Option investors are pricing in
the potential for shares to move +/-11% on earnings, which is above the
median fourth-quarter realized move. And Goldman forecasts that the
company will be even more volatile than usual, with its stock down 36%
from its June 2017 highs. The firm is bullish on the stock, seeing 34%
2) Buy Kohl’s straddles to hedge holiday weakness
Trade: Buy monthly Kohl’s straddles expiring in January, with a strike price of $42.50.
Rationale: Kohl’s has great potential to be
volatile this holiday season, but options traders are pricing in an
“unusually low potential for volatility.” The firm is bearish on the
stock, seeing 24% downside.
3) Buy Macy’s puts for holiday sales
Trade: Buy monthly Macy’s puts expiring in January, with a strike price of $20.
Rationale: Goldman expects Macy’s to earn a
bigger percentage of its annual sales during this holiday season than
in past years, creating the potential for volatility. Despite the
company’s 44% year-to-date decline, Goldman notes that options investors
are not hedged for further downside risk.