Name That Trade (S)- Macy’s Parade $M

by Dan November 7, 2014 2:39 pm • Commentary

Despite some high profile disappointments in the last couple of weeks by retailers like ANF, COH, KORS, KSS and WMT, the sector as a whole has caught a rally of late. The  increased optimism about the U.S. consumer heading into the all-important holiday season is largely the result of better employment and lower oil prices.  The XRT is making a new intra-day high today:

XRT 1 year chart from Bloomberg
XRT 1 year chart from Bloomberg

Macy’s is a stock that we have had our eye on for the past few months, since their fiscal Q2 earnings disappointment back in mid August.  The company maintained their current year guidance and technically held its 200 day moving average, and quickly made a new all time high after the miss.  That high didn’t hold, and the stock has remained range-bound for much of the past six months, basically trading in between $55 and $60:

Macy's 1yr chart from Bloomberg
Macy’s 1yr chart from Bloomberg

On Wednesday Nov 12th, prior to the open, the company is scheduled to report its fiscal Q3 results.  The options market is implying a one day move of about 4.5%, which is basically inline with the 4 qtr avg move of about 5%.

So here is the thing – with the stock nearly back to the prior highs, I suspect it will take a beat and raise for the stock to break out to new all time highs.  I have no idea if they will be able to do so, but I suspect that the stock’s recent strength incorporates a bit of the good news, and if I were the company, why not give conservative guidance in a volatile retail environment.

As for the potential downside, likely one of the reasons the stock has been bought on bad news throughout the past year is that valuation is still cheap relative to peers.  Macy’s trades at a 13.5x P/E, with expected EPS growth of 10-12% over the next 2 years.  That’s quite undervalued compared to most retail stocks and to the broader market.

So we have two trade ideas:

One for those who want to take mildly bullish stance and fade the breakout on earnings and finance the purchase of longer dated calls in anticipation of reasonable guidance and later strength into the Holiday season.

TRADE: M ($60) Buy Nov / Jan 62.50 Call Calendar for 1.00

-Sell to open 1 Nov 62.50 call at .65

-Buy to open 1 Jan 62.50 call for 1.65

Break-Even on Nov Expiration:

-Max profits with stock at $62.50 on Nov expiration

-losses of up to $1.00 if stock is significantly higher or lower than $62.50 on Nov expiration.

Rationale:  This trade is leaning bullish (only 8 long deltas), so it’s not playing for an outsized move. In a way it is a sort of a placeholder to help finance a longer dated bullish play. After November expiration it becomes much more bullish so if the stock is below $62.50 on Nov Expiration I would look to possibly spread by selling a higher strike call against the Jan 62.50 call that I own in an effort to further reduce my break-even. The structure sells November vol at 34 and buys January for 26.

We are not doing this trade now, will could do it on Tuesday, prior to Wednesday’s earnings so we have a better shot of getting our strikes correct.


For those looking for protection, or an outright bearish trade:

TRADE: M ($60) Buy Nov 60/ 55 Put Spread for 1.30

-Buy to open 1 Nov 60 put for 1.65

-Sell to open 1 Nov 55 Put at .35

Break-Even on Nov Expiration:

Profits: btwn 58.70 and 55 make up to 55, max gain of 1.30 at 55 or below

Losses: up to 1.30 btwn 58.70 and 60, max loss of 1.30 above 60

Rationale:  The stock was at $55.70 just 4 trading days ago, and I am not really sure what this week’s strength is all about.  This trade targets a break-even at a level where the stock was trading just this morning.  For those who think the company will issue cautious guidance this week’s strength offers a beauty of entry for a defined risk short trade.