Investors focus on retail as volatility gets pounded

Today’s tickers: COST, XRT, DHI, DLB, IYZ & INTC COST – Costco Wholesale Corp. – Estimated second quarter earnings for the warehouse retailer were way off analyst expectations of 70 cents per share, and investors should not expect to hear much more regarding 2009 estimates from the Washington-based company. It appears that they have washed their hands of such a task given the tough terrain and uncertain pitfalls that the retail sector faces in the coming year. Option traders wasted no time getting in on the action, although trades appear to be more optimistic than one would expect given that shares have slipped nearly 9% today to $42.07. In the February contract it appears that traders are pocketing rising premiums by selling puts. Gains were most apparent at the February 42.5 strike where over 1,000 puts were sold for 1.46 each, and at the February 45 strike where over 1,200 puts sold for 2.96 apiece. In March it appears that one trader initiated a sold strangle play by selling 2,000 calls at the 45 strike for 1.43 and selling 2,000 puts at the 40 strike taking in 1.52 per contract. The net 2.95 premium written by this investor indicates that shares will remain hemmed between $37.05 and $42.95 through March expiration. XRT – SPDR S&P Retail ETF – This premium-selling theme spilled over into the retail exchange traded fund where investors sold a total of more than 23,000 puts at the February strike using the 19.0 strike. Today shares have added to above $20.00 in the fund whose holdings include famous stores such as Family Dollar, Guess? Inc., Supervalu Inc., Aeropostale and online store, Amazon.com. The option activity has the investor taking in the premium, which is trading at an implied volatility reading of 53% and nets the investor an average of around 45 cents. In this case shares would need to decline to a breakeven beneath the put’s striking price at $18.55 before the investor loses money. Should shares continue to rebound those sold puts will expire without value. DHI – DR Horton Inc. – Option implied volatility is now at its lowest level since October at DR Horton as option actors play out a couple of interesting trades in Wednesday’s session. A covered put play was established early this morning involving the sale of both stock and puts employing the February 7.5 strike, where 25,000 lots were sold at 65 cents. Shares, which were…