M – Macy’s, Inc. – Options strategists employed diverse tactics on the department store operator today after the firm posted a 2.6% increase in sales for the month of May in 2010 as compared to sales realized in the same month last year. Macy’s also revealed a 1.4% increase in same-store sales in the four weeks ended May 29, 2010. Shares of the underlying stock rallied 2.95% this morning to touch an intraday high of $23.06, but surrendered earlier gains this afternoon to stand 0.15% lower on the day to $22.37 as of 12:17 pm (ET). Bullish options players enacted bullish risk reversals on the department store operator while investors expecting Macy’s shares to stagnate sold straddles in the July contract. Investors keeping an eye on upside potential sold 1,324 in-the-money puts at the July $23 strike for an average premium of $1.55 apiece in order to buy 1,324 calls at the same strike for a premium of $1.30 each. Risk-reversal plays pocket a net credit of $0.25 per contract, and keep the full amount received if Macy’s shares settle at or above $23.00 at expiration. Additional profits accumulate should shares rally above and beyond $23.00. In contrast, straddle-sellers are betting shares are likely to settle at $23.00 at expiration. Investors sold approximately 1,600 calls and 1,600 puts at the July $23 strike to take in a gross premium of $2.85 per contract. Straddlers keep the entire premium if Macy’s shares settle at $23.00 at expiration next month. The premium received erodes down to $0.00 and turns into increasing losses if shares shift away from strike price selected. Losses start to accumulate for straddle-sellers if shares of the underlying stock rally above the upper breakeven price of $25.85, or if shares slump beneath the lower breakeven point at $20.15, ahead of expiration day in July.
Affiliation: Interactive Brokers
Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.
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