More action in store?
10/18/18

●Down-trending Macy’s (M) broke bottom of trading range for second time in four days

●Move accompanied by heavy options volume, more puts than calls

●Volatility spike could boost options prices


 

Sometimes options activity can clue you in to things happening in a market that may not be obvious in its price action.

Yesterday was not one of those days for Macy’s (M), although things were definitely interesting in options land: Less than 90 minutes into the trading day, LiveAction scans showed more than five times the average daily number of Macy’s options had changed hands, with call volume three times normal and put volume nearly nine times its usual clip.

But the price action removed any mystery why this may have been happening, as the stock was down around 4.5% on the day, and had broken out of the downside of its most recent consolidation and below its most recent swing low:

Macy’s (M) 4/18/18–10/17/18. Macy’s (M) price chart. The down staircase.

Source: OptionsHouse

In a word, everybody was busy in Macy’s. Who knows, maybe even Macy’s stores were busy.

Yesterday’s move was the latest in a series of stair-step breakdowns below support levels and consolidations that have occurred since the stock hit a year-to-date high on August 14—just before releasing earnings that beat headline numbers but also revealed tight margins that threatened to weigh on future performance.1 The recent down day on October 11 was (take your pick) either a slight widening of the trading range or a false downside breakout that failed to reverse into a rally.

Macy’s doesn’t release its next numbers until November 8, so the company probably won’t be making a case between now and then that the worst is behind it. Given that, traders have the realities of price action to rely on. Barring an immediate upturn, especially one that pushes the stock back toward the highs of the recent consolidation (around $34), momentum traders may be looking for more downside pressure. The stock hasn’t yet given back 50% of its November 2017–August 2018 rally; that level is around $29.60. The May swing low visible at the left edge of the price chart is around $28.30.

The flurry of action also inflated implied volatility (IV) in Macy’s options, which showed up on a  LiveAction scan for the biggest one-day IV gains and topped the scan for one-week IV gains:

LiveAction scan: Large one-week IV increase, 10/17/18. IV jumped 41%.

Source: OptionsHouse

All else being equal, higher IV (which is the market’s estimate of future volatility embedded in an option’s price) translates into higher options premiums, which could offer opportunities for traders to sell relatively high-priced options.

Because of yesterday’s big sell-off, put options were juiced up much more than calls, but traders expecting more downside—or at least a failure to rebound to the high of the recent consolidation in the next month or so—could have sold, for example, November $34 call options for around $1.24 yesterday. Traders expecting a rebound could have sold, say, November $30 puts for around $1.10.

Volatility can rattle trader cages, but those who stay objective have the best chance of enjoying its benefits and sidestepping its pitfalls.

Market Mover Update: After gaining more than 4% during Tuesday’s regular trading session, Netflix rallied more than 9% intraday yesterday (although it pulled back significantly from its high) in the wake of its Q3 earnings release, which showed greater-than-expected subscriber growth (see “Streaming video, streaming prices”).

Yesterday was the first day of legalized marijuana in Canada, and cannabis stocks dropped across the board.

Today’s numbers (all times ET): Leading Indicators (10 a.m.); China—GDP, Industrial Production, Retail Sales (10 p.m.)


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1 U.S. News & World Report. Macy’s (M) Stock Faces Uphill Battle. 8/17/18.