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Bearish Options Premium Spike Ahead of Macy's Earnings

M stock has more than doubled year-over-year

Aug 14, 2018 at 11:15 AM
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Retail earnings season is heating up, and Cincinnati-based department store chain Macy's Inc (NYSE:M) is preparing to unveil its second-quarter results before the stock market opens tomorrow, Aug. 15. Ahead of the event, M stock is trading up 2.6% at $41.11, but options traders have been bracing for a quick post-earnings retreat.

In fact, short-term speculators are much more put-heavy than usual toward the retailer. Schaeffer's put/call open interest ratio (SOIR) for Macy's stock is docked at a top-heavy 1.75, and ranks in the 75th annual percentile -- pointing to a heavy put-skew in the front three-months' series of options.

Drilling down, peak open interest in the front-month series -- which expires at the close this Friday, Aug. 17 -- is found at the August 36 put, where 21,138 contracts currently reside. Data from Trade-Alert suggests significant buy-to-open activity here in late May when Macy's was trading near $34, indicating options traders were expecting a lackluster summer for the retail stock.

However, data also confirms some sell-to-open activity here. While it's possible some speculators are using these short puts to set a floor for M shares, it's more likely they're hoping to capitalize on a post-earnings volatility crush -- which would theoretically make it cheaper to buy back the options.

It's certainly a prime time to sell premium on M puts. Not surprisingly, the stock's 30-day at-the-money implied volatility (IV) is elevated ahead of tomorrow's event -- last seen at 50.3%, which registers in the 81st annual percentile. Plus, the stock's 30-day IV skew of 8.6% ranks in the 83rd percentile of its annual range, indicating short-term Macy's puts are pricing in higher-than-usual volatility premium relative to calls.

Historically speaking, Macy's is coming off three straight positive earnings reactions -- averaging a next-day gain of 8.4%. On average, the shares have swung 10% in the session subsequent to the retailer's report over the last eight quarters, regardless of direction. This time around, the options market is pricing in a bigger 14% swing for tomorrow's trading.

Another move to the upside could have more shorts jumping ship. Although short interest plunged 10% in the most recent reporting period, there are still 42.32 million M shares sold short. This represents almost 14% of the security's available float, or 6.4 times the average daily pace of trading.

It's possible this latest round of short covering helped fuel a big bounce off the stock's 50-day moving average, too. Not only has this trendline helped Macy's shares more than double on a year-over-year basis, but the equity is up 15.8% since ricocheting off here in mid-July.

macys daily chart aug 14


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