Macy's, J.C. Penney Get Bearish Gifts

By David Russell

Christmas trees are usually a welcome sight to retailers, but not when bears are hanging the ornaments.

optionMONSTER's tracking systems detected bearish "Christmas tree" spreads in Macy's (M) and J.C. Penney (JCP) Wednesday as traders positioned for the department-store companies to experience modest pullbacks by December expiration.

One investor bought 3,000 December 18 puts on M for $1.25 while selling 3,000 contracts each of December 17 puts for $0.80 and December 16 puts for $0.45. The trade resulted in neither a credit nor a debit and volume exceeded open interest in all three strikes.

M fell 8.08 percent to $17.86 yesterday after forecasting weaker-than-expected fourth-quarter earnings. The retail-chain operator had rallied more than 300 percent between its low in November 2008 and its peak last month.

The Christmas tree trade will earn $1 per put owned if M falls to between $16 and $17 by December expiration. The profits erode below $16 and turn to losses under $15. The strategy resembles a ratio spread because it involves selling more options than are bought but is more conservative because two different strikes are written.

Investors apparently thought the negative news from M would also apply to JCP, which releases earnings Friday morning before the bell. JCP's last report on Aug. 14 was better than expected, although management raised guidance toward the low end of analysts' estimates. The stock fell 4.11 percent to $29.87 yesterday and is down 16 percent in the past month.

The Christmas tree on JCP included the purchase of December 30 puts for $1.65 and the sale of December 28 puts for $0.90 and December 27 puts for $0.65. The trade cost a net $0.10 and will earn maximum profits between $27 and $28.

Overall options volume was four times greater than average in M and three times above average in JCP. Puts exceeded calls in both names.

(Chart courtesy of tradeMONSTER)

Comments

[Michael Shu...:]

Macys is also a long term short -- they have a horrible balance sheet and when interest rates rise in the next 9-18 months and spreads widen again on sub-par corporate debt, their debt service will approach unsustainable levels.

Nov 12 08:55 PM