Considering Our Options – Making a Meal of a Macy’s ($M) Long

by CC March 23, 2015 12:09 pm • Commentary

Back on February 20th we took a bullish view on Macy’s with a March call spread that was slightly out of the money. Macy’s struggled a little bit to break above its 50 day moving average in the subsequent weeks:

Screen Shot 2015-03-23 at 9.53.57 AM
6 month M from LiveVol Pro

With only a few trading days left before expiration last week, we took a loss on that call spread with the idea that we’d adjust and roll that view out a little:

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.

Soon after we did roll the view with a calendar trade, selling a slightly out of the money call in April to finance the purchase of one in May:

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

What happened next was typical when you overtrade/think. The stock broke above its 50 day moving average, right through our calendar strike while the original trade would have actually expired as profitable (not huge, but still a winner).

In hindsight I’m not sure we had any other choice on closing the original trade. The stock needed a fairly extraordinary move to get in the money and although it did happen in this case, it doesn’t generally. Although it does happen more often than usual lately as Enis wrote about this morning (Grind Lower, Crash Higher).

So now we have a call calendar on that is actually short deltas. Something we didn’t want right away. We’re still in decent shape here if the stock pulls back a little. But if that does happen we’ll want to adjust again and keep the bullish view on rather than a range trade that we currently have.

Right now the call calendar is short about 4-5 deltas. So not a ton of risk here as far as direction goes. But that’s only if the stock doesn’t go crazy on the upside. Those deltas will get shorter the higher we go, and closer to neutral the closer the stock gets to $65.

Ideally we see a little pullback towards $65 and we can close the April call and roll that short call out to May to create a vertical. Mark to market the trade is worth a few cents more than we paid for it. The longer it hangs out here the better the roll will be. And at $65 would be the ideal point to roll. Of course we’ll have to keep a leash on it if the stock goes higher. We’ll update on the site when we adjust.