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With the possibility that consumer sentiment could turn sour, off-price discount department store Ross Stores (ROST) makes plenty of sense. Sure, it’s technically levered to the wider discretionary retail space. However, the term discretionary is a bit deceptive with Ross. After all, you can’t just walk into a business interview naked and that’s the cynical reality undergirding ROST stock.
Yes, the COVID-19 pandemic revolutionized social norms, with perhaps the most conspicuous change stemming from the shift to remote operations. However, based on the latest developments, it’s unlikely that this change will permanently stick. For example, Amazon (AMZN) mandated that its employees come into the office three days a week. Most recently, it stated that it will fire those who refuse.
Also, Nike (NKE) recently announced that its workers must come into the office four days each week. And let’s just be brutally honest. If companies were truly benefiting from remote operations, they would likely keep the initiative going. I don’t think there’s a conspiracy going on about managers wanting “control” over their workers.
Rather, it’s probably the answer that requires the fewest number of explanatory variables – remote work just isn’t working. But whatever the case may be, employees have a stark choice. Either play ball or lose their jobs.
I’m going to bet that when push comes to shove, people will choose their jobs over demanding conveniences that many enterprises are simply not willing to give. And that bodes well for ROST stock since it implies an increased demand for professional wardrobe upgrades at a discount.
So, why are put options flying out the door against Ross Stores?
Bears Crowd into a Downside Trade for ROST Stock
Following the close of the Oct. 20 session, ROST stock represented one of the top highlights in Barchart’s screener for unusual stock options volume but for less-than-desirable reasons. Total volume reached 25,076 contracts against an open interest reading of 64,974 contracts. The delta between the Friday session volume and the trailing one-month average metric came out to 624.74%.
That was enough to land ROST stock as the caboose in the top 20 most unusual options list by volume dynamics. However, the eyebrow-raising materialized because of the transactional variance. Specifically, put volume clocked in at 21,764 contracts versus call volume of only 3,312. On paper, this pairing yielded an unsightly put/call volume ratio of 6.57.
Diving into the granularity, the most unusual option was the Dec 15 ’23 100.00 Put. Volume for this transaction reached a total of 8,828 contracts. At the time, open interest was only 472 contracts, implying a sudden surge in demand for this option. Notably, the bid-ask spread as represented by the midpoint price came out to 9.52%, which is rather high given the relatively modest implied volatility (IV) of 35.93%.
Per Barchart, the average IV of the nearest monthly options contract that is 30 days out or more presently sits at 33.23%. Still, the more important consideration is who is underwriting the risk? If it’s retail traders doing the underwriting for other retail traders, that’s one thing. But if it’s a small group of institutional investors, that’s a completely different matter.
Looking at Fintel’s screener for options flow – which exclusively targets big block trades likely made by institutions – I see no evidence that any major trader participated in ROST stock options during the Oct. 20 session. Therefore, it appears that a large group of retail traders bought the $100 puts.
But why that strike price? Looking at the one-year technical price chart, you can see a horizontal support line that “protected” ROST stock at roughly the $100 level from March through early June of this year. Therefore, it appears that traders are betting on the seemingly obvious downside target.
Pay Attention to the Fundamentals
While it might seem logical that ROST stock might drop to the $100 level – seeing as how it fell to that point earlier – it’s also important to consider fundamental factors. You don’t want to completely rely on technical analysis as gauging trading sentiment through chart patterns lacks epistemological rigor.
Mainly, the trade-down effect should theoretically benefit ROST stock. With the possibility of a recession on the horizon, people will be looking for discounts for necessary or important items. Ross Stores fills the gap nicely with its bargain rates, making it an ideal retailer given the circumstances.
Second and perhaps more importantly, Ross features better-than-average pricing power. Yes, revenue has gone up on a trailing-12-month (TTM) basis compared to its fiscal year 2023 results. However, its gross margin also improved against the aforementioned comparative period.
With other retailers being forced to significantly swap profits for sales, Ross is in an enviable position. Now, where the retailer falls short is in the operating margin department. That may have led to some of the volatility witnessed in ROST stock in September.
However, if you were bearish, that was probably the time to bet on put options. Right now, with a lack of institutional investor interest in Ross Stores, you’re probably better off avoiding the short-side narrative.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
