Shares of department store chain Macy’s (M) are down about in-line with the overall stock market over the last year. One trader sees a further decline ahead.
That’s based on the May $19 puts. With 105 days until expiration, 20,012 contracts traded compared to a prior open interest of 346, for a 58-fold jump in volume on the trade. The buyer of the puts paid $0.77 to make the bearish bet.
Shares recently traded for about $23.50, so they’d need to fall about $4.50, or nearly 25 percent, for the option to move in-the-money. The strike price is still well over the stock’s 52-week low of $15.10.
Revenues slid 4 percent over the past year, and earnings dropped by more than half, far in excess of the company’s stock performance. While shares still look cheap at 6 times forward earnings, a slowdown in consumer spending could lead to further declines in these key metrics.
Action to take: Investors interested in shares can likely get a better price by waiting for the next pullback. A drop under $20 would put the stock’s dividend yield north of 3 percent, which would be a reasonable amount of income for the uncertainty of investing in a retailer in a slowing economy.
For traders, the puts are well positioned to benefit from a drop in shares, given their low cost and medium timeframe. Traders can likely see high double-digit returns or better on a drop in shares before the option expires.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.