Subscribers More Than Doubled Their Money on Massive Macy's Stock Move

Breaking down a big winner from Schaeffer's Weekend Trader Alert

Managing Editor
May 24, 2018 at 2:34 PM
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Subscribers to Schaeffer's Weekend Trader Alert just scored a 101% profit with the Macy's Inc (NYSE:M) June 27 call. We're going to take a look back to see why we were initially bullish, and how the options trade unfolded.

At the time of our recommendation in early April, we noted that M had soared to a fresh annual high in late February, and the stock's pullback from that peak found support from the $27 level. This area had previously acted as resistance since the stock's May 2017 bear gap, but then seemed to have switched roles to act as support. M had already gained 18% year-to-date, but with plenty of pessimism lingering in the background, we felt that it could being to unwind to fuel future gains.

Despite the stock's strong price action, analysts were still skeptical. Of the 12 firms covering the shares, 11 continued to maintain a "hold" or "sell" rating, which left the door open for upgrades to draw more buyers to the table.

Digging deeper, the April options series for Macy's stock featured heavy put open interest at a number of out-of-the-money strikes, which could have acted as potential short-term support. This put-heavy skew was echoed by the stock's Schaeffer's put/call open interest ratio (SOIR) of 2.14, ranking in the 97th annual percentile. The elevated ranking showed short-term options traders had rarely shown a greater preference for puts over calls in the last year.

Daily Chart of M Since Feb with Entry and Exit Dates

What's more, short interest had risen 22% over the previous two reporting periods, and at the time represented 17.2% of the stock's total available float. At the security's average trading volume, it would have taken nearly a week for shorts to cover their bearish bets, which left M well-positioned to benefit from short-covering in the weeks ahead.

We also suggested that it was a good time to bet on more upside via options since M's Schaeffer's Volatility Index (SVI) of 40% ranked in the 20th annual percentile. This suggested that relatively low volatility expectations were being priced into short-term contracts.

In our Weekend Trade Alert series -- released Sunday, April 1 -- we recommended that subscribers buy the June 27 call. The stock fluctuated for most of April, but eventually rallied to a fresh annual peak of $35.11 on May 21 following an impressive earnings release a few days prior. This allowed us to close the trade and lock in a 101% profit.

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