Is the Options Market Suggesting an Uncertain Holiday Season?

By: William “Bill” Speth, Chief Research Officer

If Santa Claus should fail to call, bears may come to Broad and Wall. That colorful
old saw reinforces just how much impact investors believe that holiday sales have
on the stock market.

Should Santa be generous, it suggests that consumers – and that’s who drives
about two-thirds of the economy – are optimistic. When that happens, it is often
interpreted as a bullish sign for corporate earnings.

This year – even more so than normal – all eyes are on holiday sales. The stock
market is dancing around all-time highs, fundamental valuations are often at
peak levels, while Main Street is worried about a congested supply chain making
it difficult to get presents in time for the holidays.

An analysis of options on retail stocks – a way to reveal the views of sophisticated
investors – shows a tiering effect in the stocks that make up the SPDR S&P Retail

The exchange-traded fund is comprised of about 100 stocks in 10 retail segments.
Since late October, as holiday sales and supply chain uncertainty became a major
market concern, XRT’s components have begun to telegraph intriguing signals
about Black Friday, Cyber Monday, and holiday shopping overall

The average 30-day implied volatility of options on Multiline Retail / General
Merchandise stocks in XRT, the retail sector proxy, has increased 41.4% since late
October, more than double the increase for XRT options.

The heightened implied volatility suggests that investors expect brick-and-mortar
retailers to face an uncertain holiday season.

Yet, over the same period of surging implied volatility in many other retail stocks, the
implied volatility of options on Internet & Direct Marketing retailers has declined by

Bottom line: the options market expects Santa and his elves could be spending a lot
more time shopping online with fewer disruptions and perhaps spending less time in

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