Scoping Out Unusual Volume In M’s Pits

Hey Traders,

It’s no secret that as an options trader, I always want to know where the money goes …

It’s the big money trades that often hold the secrets to where a stock is headed next … and if you play it right, that information can be very valuable to have.

I watch these “smart money” trades because a lot of times, that’s exactly what it is … smart money. Someone with tools and resources other people don’t have that is leveraging their advantage to bank some big dollars on huge trades …

But you don’t need a hedge-fund size account to make trades like this … we’ll actually show you how these hedge funds do it, and how you can do it in your own trading, during our groundbreaking event on July 29. Watch your inbox — you’ll get your official invitation soon.

And today, let’s take a peek at a “smart money” play on Macy’s (Ticker: M). We’ll dig into the trade data and try to interpret the message we can take from this $715k buy in M’s pits.

Let’s dive right in.

It’s no secret that retailers have been struggling the last few years. In case the rise of online shopping wasn’t enough, COVID lockdowns just exacerbated the problems retailers were facing, even forcing some to close their doors forever (RIP Barney’s … my wife misses you).

Macy’s is certainly not immune to the retail hardships, and the chain has also been forced to shutter quite a few locations over the last several years, including 45 stores in the first half of 2021.

Chart courtesy StockCharts

However, the post-pandemic era is seeing a Macy’s comeback … sort of. The shares are currently battling to crack above their mid-2019 highs, and they’ve recovered quite a bit from their sub-$5 2020 lows, closing at $16.86 on Tuesday.

What does “smart money” think is in store for M?

Yesterday, we saw some unusually large trades cross the tape in Macy’s option pits.

One trader in particular seemed to think there’s still gas in the tank for M to climb higher from its Tuesday close …

Just not too much higher. At least, within the next month or so …

This “big money” bettor opened a bull call spread on the August 18-strike calls and 20-strike calls.

They paid $0.73 (over asking price!) for 9,800 August 18-strike call contracts, while selling the same number of August 20-strike calls for $0.30.

That rings up to $715,400 for the 18-strike contracts, though they were able to subsidize $294,000 by selling the 20-strike calls, bringing their total to $421,400. How’s that for a discount?

On its face, this shows us that this trader has a strong reason to believe that M won’t be taking a tumble before August expiration, although it likely won’t be skyrocketing, either.

Digging a little deeper, there could be another motivation for this trade. M options are relatively cheap right now, with M’s 30-day implied volatility (IV) sitting in just the 13th percent of its annual range.

Macy’s is set to report earnings on September 1, 2021. Typically, we expect to see IV rise as a company nears its earnings call. Traders are simply anticipating a potential post-earnings move. After earnings, however, IV tends to sink like a stone, which is why I rarely hold a trade through an earnings call.

In this case, it’s possible that this trader wanted to get in while the getting’s good, and will be looking to capitalize on any rising IV headed into expiration – which is just a few weeks ahead of M’s earnings.

However, with bull call spreads like this, the delta of the spread (how much the price of the option will change for every $1 change in M’s price) is more significant than the vega (how much the price of the option will be affected by a change in M’s IV) so I would assume this trader is more interested in M’s actual price movement over the next several weeks, versus the anticipated price movement.

And if they’re right? Well, they stand to make a cool $1,538,600.

Are M’s worst days behind it?

Someone out there seems to think so … at least for the time being, delta variant be damned.

Your Only Option,

Mark Sebastian

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