5 Option Trades to Profit From the New Frugal

by Michael Shulman | October 8, 2010 10:35 am

Longs and Shorts to Play the Trend

The “New Frugal” is the next big investment trend[1]. What is the New Frugal exactly, you ask. Well, it’s not just a shift to reduced spending, but to a different kind of spending. Frugal doesn’t mean that consumers aren’t shopping; it means that they are making practical decisions and choosing less expensive options.And this is not just a passing fad. Unemployment, rising medical costs, low consumer confidence and a hosing market in shambles will see to that. So this is the place to trade, both short and long, in the coming months.Here are five option trades to profit from the new frugal.

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#1 SPDR S&P Retail ETF (XRT) Puts

Consumers have been and will continue to pull back spending and trade down in all consumer segments. But rather than trying to guess which stocks will suffer most, put options on a retail ETF are the way to go.The best ETF to use[3] is the SPDR S&P Retail ETF (NYSE: XRT[4]). It tracks the S&P Select Retail Industry Index, and holds roughly 100 stocks with none accounting for more than 1.7%, and the top 10 holdings equaling less than 17%. This means XRT is not overly sensitive to upside surprises from discounters or any individual name. The top 10 include everything from Sally Beauty Holdings, Inc. (NYSE: SBH[5]) to CarMax, Inc. (NYSE: KMX[6]). In short, this is how you gain exposure to the retail segment that should suffer most, i.e., higher end and specialty retail shops.Play XRT with put options that expire in January 2011 or later. By then, the Street will have come to the realization that the holiday shopping season was a bust.

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#2 Starbucks (SBUX) Calls

With consumers focusing on the “I need” not the “I want,” who needs a $4 latte from Starbucks? Interestingly enough, though, when the going gets tough, people often treat themselves to the little splurges, and low-end luxury food sales tend to go up during recessions.I am not suggesting that Starbucks Corporation (NASDAQ: SBUX[7]) is a growth stock, but expectations are very low, and the company is raising prices on selected coffee drinks[8], which will in turn raise profits. Look at SBUX call options that expire next year.

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#3 Financial Select Sector SPDR ETF (XLF) Puts

Many U.S. banks are insolvent by pre-financial-meltdown accounting standards, and when the market rallied in March 2009, management did not raise enough capital. Instead, they choose to protect existing shareholders, meaning themselves.Well, the economy is worsening, their book of business will not generate enough profits to enable them to meet Wall Street projections, and eventually the toxic waste they have on their balance sheets is going to come to light and hit their profits. In short, it’s one big mess waiting to blow up.Your best bet here is to find the longest possible expiration date for puts on the Financial Select Sector SPDR ETF (NYSE: XLF[9]).

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#4 Expedia (EXPE) Puts

I recently returned from Europe, so I can say first-hand that things there are not good, and they’re getting worse. I booked a room at the same hotel I stayed at when I was on my honeymoon 25 years ago, and it was less expensive than it was in 1985. No joke! And I learned from more than one frustrated taxi driver that tourists are not spending any extra money.It’s a tough time to be a travel company, especially if your main growth area is Europe, which is the case for Expedia, Inc. (NASDAQ: EXPE[10]). Look at EXPE puts that expire next year.

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#5 Cepheid (CPHD) Calls

The New Frugal has extended into health care. Cutting spending is the norm, but there are certain kinds of equipment that save money — and lives — and sales are benefiting.One winner is the GenXpert system made by Cepheid (NASDAQ: CPHD[11]). This diagnostic system enables hospitals to quickly (within a couple of hours) determine if a patient has a hospital acquired infection (HAI), including MRSA. This enables hospitals to radically cut the infection rate — up to 90% in some places. Medicare no longer pays to treat most HAIs, so hospitals need to save money by nipping them in the bud.CPHD is a volatile stock. Take a look at calls that expire in 2011. 3 Cheap Stocks to Rebuild Your Wealth — Includes the three small caps under $10 a share that could double your money by year-end and the 26 time bombs to avoid like the plague. Plus, the five red flags for buying cheap stocks. Get your FREE report here.[12]

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