A few days ago, Macy's Inc (NYSE: M ) caught a downgrade which sent the stock tumbling 4% on the headline. I went long M stock on the dip and have been lucky enough to have profits in my pocket given the favorable price action that followed.
This morning management reported a beat on all metrics and the stock popped 12% on the headline. So, I'd like to reset another long M stock trade now that the earnings report is out of the way. The best trades are set thereafter. The short-term reactions to the earnings headlines are more gambling than investing. They often have little to do with the quality of the report.
Let me start by saying that I am not a perma-bull for Macy's stock. In fact I have been a long-time critic of it and the rest of the brick-and-mortar retail sector. The rise of Amazon.com, Inc. (NASDAQ: AMZN ) decimated their business and their stocks. They waited too long to react to the AMZN onslaught and so they are still playing catch-up.
Now while most of Wall Street consensus is that Macy's has already made the turn, I remain a skeptic. Yes, they are growing their online business, but they are not taking back clients from AMZN. They are stopping the bleeding by migrating current foot traffic to online transactions. So I consider this a trade and not an investment.
From a valuation perspective M stock is cheap. It has a price-to-earnings of 6. So owning shares at a discount from current price is not likely to be the mistake. If I am put the stock at a big discount, I am confident that I can profit from them in the long run. And therein lies my opportunity.
To reiterate that I am not a fan of the stock, I am more comfortable betting on the downside support holding through 2018 than chasing the upside potential. I simply need support for M stock to hold. Time will then do the heavy lifting and premiums will expire in my favor. But just in case, I have to be ready to own the shares at that level. If a rally ensues my profits will come faster.
Coming into the earnings report the stock was already in technical danger. It needed to hold certain levels so not to trigger waves of momentum selling. It did so in spite of downgrades and severe market-wide jitters. For more on this click here for the details and to get an ongoing free copy of my weekly newsletters.
Options Ideas for M Stock
The Trade: Sell M NOV $24 naked put. This is a bullish trade where I collect $1.30 to open. Here I have a 80% theoretical chance of success. But if price falls below my strike then I accrue losses below $22.70.
Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.
The Alternate Trade: Sell M NOV $24/$22 credit put spread. The spread has the same odds but carries less risk. Neither trade require a rally to profit. In fact the stock can fall an additional 25% and I could still retain maximum gains. Time will then do the heavy lifting and premiums will expire in my favor. But just in case, I have to be ready to own the shares at that level.
Nicolas Chahine is the managing director of SellSpreads.com . As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits .
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