Is This Retail Stock a Bargain-Basement Buy?

Macy’s M – NYSE

Monday, May 15, 2017

Macy’s M – NYSE fell off a cliff last week after missing earnings estimates yet again, plummeting 17% straight into the dumpster. But just when all seems lost for retailers, a sharp trader bought 7,000 M August 27/30 bull call spreads and simultaneously sold 3,500 M August 21 puts earlier in today’s session.

M

This trade is unquestionably bullish, but not as much as it might seem to the naked eye. This customer paid $0.36 per bull call spread for a total debit of $252,000, and collected $0.86 per put sold for a total credit of $301,000. All told, he collected $49,000 in option premium.

Essentially what this means is M doesn’t need to go up a single penny for this trade to pay off. Shares just can’t drop below $21 (-9.5%) by expiration in August. If so, he’ll lose $350,000 for every dollar M drops beneath this threshold.

To the upside, if M can get back above $27 (+16.4%), not only will he keep the $49k credit but he’ll pocket $700,000 for every buck M rises to the short strike at $30.

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