Retail Options
The list of retailers, right, is sorted from high to low with respect to volatility. Etsy has the highest volatility among the group, while Costco has the lowest. So how should these stocks be traded?
Let’s examine a semi-aggressive bullish strategy and a semi-aggressive bearish strategy for Etsy and Costco. These are debit spreads, so the risk associated with them is capped—the only risk is the value paid for the spread. But the potential profit is the width of the spread minus the amount paid for the debit spread.
Traders can create debit spreads in the same manner as the two shown. Generally, the idea is to create the spread so that the breakeven is below the current stock price for a bullish strategy, and the breakeven is above the current stock price for a bearish strategy. With that strategy, the stock doesn’t have to move much to provide a profit.
For example, for Etsy, the breakeven for the debit call spread is:
The long call of 160 + the debit paid of 2.88 = 162.88 breakeven
And the breakeven for the debit put spread is:
The long put of 170 – the debit paid of 2.52 = 167.48 breakeven
Michael Rechenthin, Ph.D., (aka “Dr. Data”) heads data science at tastytrade. @mrechenthin
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