Will a better employment picture, a positive, if not spectacular, Black Friday shopping weekend in the US, improve the prospects for consumer-related stocks?

Before getting too excited, let’s not forget that US consumers are still fixing some very fragile balance sheets. Black Friday saw 195 million shoppers visit US stores, up from 165 million the previous year. That’s positive! But, that’s off a base of depressed numbers, as last year consumers frozen by a financial crisis that was just getting into high gear. And note too, that even with signs of stability and a widespread belief that a recovery is underway, consumers still spent approximately US$30 less (about a 10% decline) than last year.

The point here, is that any strategy hinging on the consumer is fraught with risk. Not so much when looking out a year or two, but certainly, when trading over the next three to six months. If investors begin questioning the strength of the recovery then sentiment will shift. Consumers stocks will likely feel the brunt of that sentiment shift.

At this point however, sentiment is clearly behind the consumer. Canadian S&P/TSX Consumer Staples Index soared in November, as did consumer discretionary stocks that were recovering from their late-October dip. Leading a number of analysts who believe the consumer is coming out of hibernation, to post buy recommendations on stocks in these sectors.

Fortunately for option traders, they can ride this consumer backed sentiment with limited risk. Buying January or February calls for example, on stocks like RONA Inc. (TSX: RON, recent price $15.26) or consumer staple stocks like Shoppers Drug Mart Ltd. (TSX: SC, recent price $43.15).

Note though, that options on these stocks have limited liquidity. RON options rarely trade which means you will most likely be paying the offered price when buying and settling for the bid price when selling. You might even think about this position as one you hold to maturity.

On the other hand, RON options – assuming you can buy 10 contracts on the offer – seem to be reasonably priced. Which is to say, the volatility being implied by the options price is less than the historic volatility the stock has recently displayed. For example, with RON trading at $15.26, the RON February 15 calls are offered at 90 cents (implied volatility 25.8% versus historic volatility of 27%)

Trading volumes on SC options are better, and a little more expensive relative to historic volatility. The SC January 44 calls at 45 cents (implied volatility 13.4% versus 11% historic volatility) seem reasonable.

Recognize that these are short-term trades that attempt to take advantage of the current sentiment around consumer related stocks. If sentiment shifts, you have at least limited your risk.