Macy's Stock Options Traders Brace for a Big Earnings Drop

M stock has a history of negative earnings, including double-digit percentage drops after the two most recent reports

Nov 6, 2017 at 3:20 PM
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It's a big week for retail earnings, with accessories designer Michael Kors (KORS) kicking things off this morning with a blowout report. Looking ahead, department store Macy's Inc (NYSE:M) is scheduled to report earnings Thursday morning. Ahead of the event, M stock is down 1.6% at $18.07 -- fresh off a seven-year low of $17.94 -- after Morgan Stanley reiterated its negative fourth-quarter outlook for brick-and-mortar retail stores, and one options trader is lowering their bearish expectations for the equity.

Taking a quick step back, 75,387 puts have changed hands on Macy's so far today, nearly seven times what's typically seen at this point in the day, and volume pacing in the 100th annual percentile. By comparison, roughly 30,000 calls have traded, about two times the expected intraday amount.

Most of the action has centered in the front-month series, due to an apparent bearish roll down. According to Trade-Alert, one speculator sold to close 20,179 November 22 puts for $3.93 apiece -- initially bought on Sept. 29 for a volume-weighted average price of $1.29 each -- to fund the purchase of a roughly equal-sized number of November 20 puts. If this is the case, they expect Macy's stock to continue its retreat through expiration at the close on Friday, Nov. 17.

More broadly, short-term options traders have shown an unusual preference for puts over calls, per the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.23 -- in the 85th annual percentile. In addition to heavy open interest at the November 20 and 22 puts, the November 18 and 19 puts are among Macy's top 10 open interest positions.

This bearish bias shouldn't be too surprising, considering M stock has lost roughly half its value year-to-date. More recently, the shares have been spiraling amid intense selling pressure from shorts, with these bearish bets more than doubling since early July to 51.85 million shares -- the most in at least 15 years.

Short sellers could continue to be in the driver's seat, should Macy's post-earnings history repeat itself. Over the past eight quarters, the stock has closed lower in the session subsequent to the retailer's report five times -- including back-to-back double-digit percentage drops in May and August. This time around, the options market is pricing in a single-session post-earnings move of 14.2%, regardless of direction, based on at-the-money implied volatility data.

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