- Most retail stores will reopen by May 15 and there will be sales reports in the weeks after.
- Current unemployment rate is above 20%. Most businesses will not operate in full capacity for months and it is likely that many of them will not reopen at all this year. That will keep the unemployment above 7% in 2020 which will be comparable with the great recession.
- The last two months have made changes in people’s consumption patterns that will persist for years. The uncertainly of the future will push people to save more by reducing consumption in several ways.
– reduce subscription for duplicating services or cancel services that are not used enough to justify the cost (ex. if you have two gym membership or two streaming services subscriptions , you will cancel one.
– you may get rid of your gym completely and continue your new exercising routine that you are already used during the lockdown. (in fact, I think a lot of gyms will close. Their business model will not work without the people paying for membership and not using the gym)
- The middle of the road consumer who used to waste money on unnecessary clothing and household items will be hit the most and it will take long to recover. these are employees that will not get back their income for at least several years.
- Those Stores selling clothing, especially mall stores like Dicks Sporting Goods (DKS), JC Penny, Belk, Dillard’s etc are going bankrupt sooner or later. Their cost is too large, debt too high and it is too late to change their business model.
- Find several retail stores with declining sales and increasing debt trends in the last year. DKS is one of them with current share price around 29. Another would be AEO (American Eagle Otfitters)
- Currently there is somewhat of a positive sentiment of the market and I believe that the shares of such stores are likely to stay at their current levels or a little higher in the next few weeks.
Buy a PUT spread OTM for June (Strike @20). Consider that at the march low DKS shares were down to $14. In my view there is potential is to go lower than that.
Option A: Sell a tight call spread OTM or a PUT spread and OTM to for the current week.
Option B (likely safer): Sell Iron Condor on LQD (Corporate grade bonds) which the Fed is buying and there is a very solid sentiment that the fed will continue buying and not let liquidity dry for those companies. There are a lot of those in pension funds, and therefore low volatility should be expected. A $0.50 wide Iron condor near the money for the following week will provide you with $0.37 ($.13 maximum loss). That will fully finance a $20 put for DKS for July.