New Trade – $M: New Parade Route

by Dan March 16, 2015 2:31 pm • Commentary

Earlier (below) I closed the March 65/67.50 call spread that I entered nearly one month ago in Macy’s. The original trade was to express a bullish view into the company’s Q4 earnings.  As I stated in the post this morning my timing was not correct but my thesis has not changed.  At this point I want to establish a trade that helps set up for the next identifiable catalysts which should be Q1 earnings in early to mid May:

Trade: M ($64) Buy to Open April / May 65 Call Calendar for .95

-Sell to open April 65 call at 1.00

-Buy to open May 65 call for 1.95

Break-Even on April Expiration:

The ideal scenario is that the stock works up towards the $65 strike. That is where the stock would have the max profit. The max risk is the 95 cents premium paid if the stock were to have a large move up or down away from the strike.  If the stock is right around 65 on April expiration I will look to buy to close the April call and look to spread a higher strike call in May and turn into a vertical to further reduce my break-even.



Previous post March 16th, 2015:  Trade Update – $M: Closing March Call Spread for a Loss

A little less than a month ago I made a bullish trade with the idea that Macy’s would re-test its prior highs. The thought was that there was plenty of short term bad news in the stock already leading up to the company’s Q4 results on Feb 24th. Here was the trade from Feb 20th:

TRADE: Macy’s ($63.25) Buy to Open March 65/67.50 call spread for 60 cents

Despite the stock being higher than where I put the trade on, it remains below the long call strike, and with just 4 trading days to expiration the premium will quickly erode if the stock can not make a move above $65. The theta (decay that occurs each day with all else like stock price and volatility remaining equal) today is already over 5c and will accelerate into Friday.

At this point, it makes sense to think about salvaging as much premium as possible as it is a relatively low probability that the trade can be profitable on Friday’s close as would need a move above $65.60, or up 2.3%.

My thesis has not changed on the stock and the prospects for a re-test of the prior highs, I am just wrong on timing and have to take my medicine.  I will look to roll this view and give myself a bit more time for it to play out.

Action: Sell to Close Macy’s ($64.04) March 65/67.50 call spread at .20 for a .40 loss.



Original Post February 20th, 2015:

A couple weeks ago I took a look at Macy’s (read below) after strong sales results for Kohls, another U.S. retail that should get the benefit from no strong dollar exposure and a consumer that benefits from lower gas at the pump.  The stock broke out to new all time highs, and has yet to look back:

KSS 1yr chart from Bloomberg
KSS 1yr chart from Bloomberg

And today, Nordstrom (JWN) broke out to new all time highs after reversing early losses on a guide lower on last night’s call:

JWN 1yr chart from Bloomberg
JWN 1yr chart from Bloomberg

JWN, like KSS has 100% revenue exposure to the U.S., as does Macy’s, and Macy’s has under-performed so far in 2015 down 3.5% on the year and down 7.5% from the all time high on Jan 7th.  I would also add that there has been plenty of news in the stock over the last couple months, as they have reported Q4 comps, reiterated 2014 guidance, made an acquisition of a beauty brand and announced some store closings.  It is my view that the stock is going to trade on fiscal 2016 guidance given next week, and if JWN’s price action post its results/outlook is to be used as a guide, then the stock could be a scoop at these levels into the print.

The stock  trades at 13x expected fiscal year earnings growth of 11% vs JWN at 20x expected fiscal 2016 growth of 8%.

TRADE: Macy’s ($63.25) Buy to Open March 65/67.50 call spread for 60 cents

-Buy 1 March 65 call for .90

-Sell 1 March 67.50 call at .30

Break-Even on March expiration:

Profits: between 65.60 and 67.50 make up to 1.90, max gain of 1.90 above 67.50 up about 7%

Losses: between 65.60 and 65 lose up to .60, max loss of .60 below 65, or 1% of the underlying stock price.

Rationale:  This trade offers a fairly attractive risk reward risking 1% into an event with the max gain at the prior highs.

From a technical standpoint, the stock has pulled back to near term support level and targeting a move on better than expected guidance back to the prior high looks like a reasonable target:

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



Original Post Feb 6th, 2015: Name That Trade(s)- $M: Considering 2015 Guidance

Yesterday in my MorningWord (Retail Therapy) I discussed the investor push and pull for U.S. retailers between those with little to no exposure to a strong dollar that benefit from lower oil (both from the benefit to their consumers and lower input costs for the business) like Costco (COST) and Kohls (KSS) and on the flip-side, retailers like Ralph Lauren (RL) that saw the benefits of lower oil for their customers offset by the headwinds of a strong dollar as a little more than a third of their sales that come from outside the U.S.  I concluded:

So all retailers are not created equal in the lower oil / strong dollar environment, one that we could be in for a while. Domestic focused stocks seem like the place to be, but I would add that the smart money has been in this second derivative trade for a while, and chasing stocks like COST which trades at 30x expected 2015 expected earnings growth of 11% could be a hard way to play going forward.

A stock that might fit in between the COST and KSS , keeping with this theme of heavy U.S. domestic sales exposure, with little to no strong dollar impact, is Macy’s (M).  The company issued Q4 guidance earlier in the week, along with an acquisition and some management changes.  Morgan Stanley downgraded the stock to a Hold (read highlights here from Barron’s). Essentially, they think the stock is expensive to itself historically and the potential for a positive guide for 2015 could be in the stock at current levels as the company might have exhausted much of the benefits from recent cost cutting initiatives.

The breakout this past week in 100% domestic used car and auto parts dealers AutoNation (AN) and O’Reilly Automotive (ORLY) got me thinking that 100% sales in the U.S. seems like the place to be. That led me back to Macy’s, which reports full Q4 on February 24th, and should give full year guidance.

From a technical standpoint, the stock broke out in January to new all time highs, but has since retreated:

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

The one year chart above points to what would be an ideal entry for the stock on the long side, and that is $60, which corresponds with the stock’s 200 day moving average (yellow line) and the low from December, before it mounted a 10% run to new highs.

Playing for breakouts is a tricky thing, it is one of the most powerful technical patterns that exists after long consolidations when confirmed by large volume.  I am going to give this idea some time to percolate. But If I were to put on a trade now to play for a post earnings breakout, I would rather look to define a range where I would be long on the upside and downside as opposed to buying the stock at current levels more than two weeks before the event.

Here are two trade ideas, the first is if I would be inclined to buy the stock right now, right here, but I am waiting for a better entry, and the second if I were inclined to play for a continued consolidation in and around $65 and I wanted to finance the purchase of near the money calls:

First – Directional:

Hypothetical Trade – Macy’s (M) $64 Buy the March 60 / 65 Risk Reversal for .75

-Sell to Open 1 March 60 put at .90

-Buy to Open 1 March 65 call for 1.65

Break-Even on March Expiration:

Profits: above 65.75, or up 2.7%

Losses: below 65 lose 75 cents, below 60 put the stock plus the loss of the 75 cents premium

Rationale:  While options prices are not exactly expensive, the sale of the put to finance the purchase of the upside call makes sense as opposed to buying the stock right here, which seems to be in no man’s land more than two weeks prior to the catalyst that could cause the breakout.  One reason I am not placing a trade now is that the stock has lost some momentum. It’s flat on a week that saw the XRT gain almost 3.5%.  Ideally I’d look for an entry closer to $60 support.


Second – Near Term Consolidation in front of Catalyst: 

Hypothetical Trade – Macy’s (M) $64 Buy the Feb / March 65 Call Calendar for 1.10

-Sell to Open 1 Feb 65 call at .55

-Buy to Open 1 March 65 call for 1.65

Break-Even on Feb Expiration:

Profits: max gains with stock in and around 65

Losses: significant move above or below 65

Rationale:  The idea here is the for the stock to close very near 65 on February expiration (in two weeks) at which point I’d look to cover the Feb 65 call, or have it expire worthless. Then I’d look to further reduce the premium at risk by spreading the March calls, or even turning into a risk reversal as discussed above.

Stay Tuned.