Gap and Wal-Mart Are the Ways to Play Retail: Najarian

This morning the government reported stronger than expected sales data for July — .8% against estimates of .3%. The day also saw strong earnings news from Saks (SKS) and Home Depot (HD), netting bulls decent profits. With more high-profile merchants set to report later this week, Breakout welcomes OptionMONSTER.com's Jon Najarian to help find the best way to play.

For starters, Najarian suggests sticking to the soft-lines. Home Depot is working for investors today, but Najarian thinks consumers on a budget are going to focus their discretionary spending on getting the kids dressed to go back to school. He says the options markets are showing the most bullish action in two names: Walmart (WMT) and Gap (GPS).

After more than a decade spent marking time, WMT finally broke above $70 this year, a level that had marked a ceiling since 1999. The discount king is up more than 20% so far in 2012, but Najarian says the market is looking for more. Specifically he sees traders selling just out of the money puts. If the stock moves lower, traders buy the shares at the strike price. If not, they keep the premium. If you're bullish on Walmart, there isn't much of a downside — provided, of course, that the company doesn't shock the world with a huge miss.

The more aggressive players are getting long Gap. With a demographic spread from Old Navy on the low end to Banana Republic on the high end, the eponymous Gap stores are in the middle, and Gap has it working in all three fashion segments. The stock market has been all over the name, driving shares of GPS up over 80% ytd. Narjarian says there's most likely more to come, and he's got a way to play it.

With GPS bumping up against $35, the Monster likes getting long the $35 "at the money" calls and selling out of the money calls higher. If GPS moves over $35, the long options move up in value. Should the stock settle between strike prices, a trader keeps the profits on the $35's and the premium from the short sale.

Najarian says the strategy is a "very cheap, limited risk shot, and I think it could pay off pretty big."

[Jeff Macke owns shares in Walmart.]