Update – Macy’s (M) Parade

by riskreversal December 16, 2016 2:32 pm • Trade Updates

Macy’s (M) had a pretty nice bounce post election like a lot of retailers. But as we detailed in a November 29th post, not many of the big box and department store retailers have a bright future with the onslaught from online retailers like Amazon. We looked to fade the recent bounce in the stock at the time of the post with a January put fly targeting a retracement of where it had gapped higher following earnings. Here was the trade and rationale at the time:

We’ll probably start to see indications of a heavily discounted Holiday shopping season for bricks and mortar retailers like Macy’s before the calendar turns. That, combined with the rally from the lows means M could revisit 40 or lower into the New Year.

*M ($43) Buy the Jan 42.5/37.5/32.50 put butterfly for $1.10
  • Buy 1 Jan 42.5 put for $2
  • Sell 2 Jan 37.5 put at .50 each or $1 total
  • Buy 1 Jan 32.50 put for 10 cents

Macy’s had a technical break below its 50 day moving average and is now lose to the center strike we targeted. With the stock 37.70 the original trade is basically a double from our 1.10 cost. But it is now at another level of important support as it’s right on its 200 day moving average:

If the stock settles in here and is able to consolidate , this trade does alot better over the next few weeks as Holiday trading takes its toll on vol and decay. But a break below here and implied vol will pick up and the stock could easily be a few dollars below our breakeven.

Therefore, for trade management purposes, what the stock does at this level is what we’re going to be keeping an eye on. If the stock breaks from here we may just take the profits. If it holds. we’ll be patient. Currently the trade is flat deltas, with about 3 cents of decay a day (meaning the trade becomes more profitable by .03 each day, with that rate increasing over time). Our breakevens on the trade are pretty far away at 41.40 on the upside, and 33.60, so we have room to be patient, but we’re near our sweet spot and if the stock could settle in here, even better. We’ll update if we make a move on a breakdown below.