Can Smart Money Trades Even The Field?

Hey Traders,

Did you catch the Formula 1 race this weekend?

I don’t know how many F1 fans are out there, but if you did, you’re probably still buzzing.

It was one for the ages … I went through every emotion in the book …

Anticipation … devastation … shock … elation …

(A little after-the-fact rage …)

And honestly, it reminded me a bit of trading.

See, on the market, you have clear favorites.

The traders everyone expects to win (hedge funds) … and the rest of us, duking it out in the back.

But sometimes … the guys in the back catch a break.

I don’t want to call it luck, because it’s not luck.

We’re out there working just as hard as the other guys, we just don’t always have the “motor” (teams of professional traders and researchers, billions of dollars in capital, etc.) to showcase our true skills.

But when you even the playing field … sometimes the little guys can end up on top.

That’s why we’ve been preaching Capitol Gains so hard over the last few weeks. When you have hedge-fund-level Deep Information and Precision Execution, it evens the playing field for those of us that don’t have a billion-dollar “motor.”

That’s also why people get so wrapped up in watching unusual trading volume.

Because when you can spot the “Smart Money” strategies … it makes it easier to go for your own undercut (okay, I’m done with the racing metaphors).

Speaking of …

Here’s a multi-million “Smart Money” trade on a retailer we talked about not too long ago

It’s no secret that retail was among one of the hardest-hit sectors during the pandemic.

But now that social distancing is becoming less of a priority … it seems people are ready to bounce back to getting their retail therapy IRL.

Macy’s (Ticker: M) has definitely been experiencing a “reopening” bounce, with the shares already eclipsing their pre-COVID 2020 levels:

Chart courtesy StockCharts

Headed into their August 19 earnings date (the day before standard August expiration), hopes are high that the retailer’s bounce-back will show on the books – analysts are expecting earnings per share of $2.15 (that’s a 197% year-over-year increase) and revenue of $22.1 billion (a 27.6% year-over-year improvement).

One Smart Money bettor seems to think that there is at least a little potential post-earnings upside to be had …

We just may not be seeing it right after earnings.

Judging from recent earnings reactions over the last few weeks … it doesn’t seem like an altogether crazy position to take!

And M isn’t exactly one for huge post-earnings swings either. Though at-the-money August straddle traders are pricing in around a 12% move, that’s significantly more than M’s median post-earnings move of 2.8% it’s seen over the last eight quarters — which 50% of the time has been to the downside.

This particular deep-pocketed trader (or institution) opened a long calendar spread on M this past Monday.

They sold a whopping 35,000 contracts of M’s August 18-strike calls, bringing in a very solid $2,555,000 …

While simultaneously purchasing 34,487 contracts of M’s September 18-strike calls for $1.13!

Without the $2,555,000 from the call sale, the outright purchase of the September puts would have cost this trader a whopping $3,897,031!

By selling the August calls, they were able to bring their initial outlay down to “only” $1,342,031 …

How am I interpreting this?

Well, there’s a few possibilities.

For one, this trader may be anticipating that while M’s shares will rise above $18 by the time the long calls expire in September … it won’t be in the trading sessions directly after its earnings report.

At the same time, this trader may simply think the September 18-strike calls are currently underpriced relative to the August term … and they’re anticipating a jump in implied volatility (IV) that will boost the price of the options, allowing them to profit.

Likely, they believe M will experience neutral price action, and remain near the 18-strike through the expiration of one or both options. This will let the trader profit off of the time decay of the front-month option as the longer-dated option retains its time value.

Because at-the-money and near-the-money calls generally have the most time value,

While M may not pop post-earnings (who does these days, am I right?), someone is laying out some big dollars that M will head back in the direction of its post-pandemic highs … or at least remain near its current perch just off the strike-price.

As soon as the shares hit $18.37 (the $18 strike-price plus the cost of the trade) this trader will be in the money on the longer-dated calls

And if they’re wrong? They’re out the cost of the spread — which we can presume won’t sting too much for a trader willing to lay out this much capital.

 I will be watching to see how M acts ahead of earnings, and how September-dated options prices behave in the interim.

Your Only Option,

Mark Sebastian


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