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Thursday, March 28, 2024

Macy’s shellshocks investors with dividend cut

Today’s tickers: M, EWJ, XLF, ACOR, TWC & GE

M – Macys Inc. – Macy’s strategy, announced this afternoon, created a whipsaw reaction for options traders. Macy’s revealed a major slash to their quarterly dividend, lowering payouts to 5 cents down from 13.5 cents. The department store has also proposed drastic cost cutting measures including the elimination of 7,000 jobs and a cessation of new hiring for the time being. Option traders responded quickly to the news by piling into puts in the February contract at the 5.0 strike where 1,400 were purchased for 20 cents. Implied volatility jumped immediately by 14% to 110% in light of the new information. The announcement must have left some traders looking for new shoes to scuff thanks to the earlier trading pattern in which we saw put sellers taking in premium at February 7.5 strike for 30 cents, at which time they perceived little risk of shares falling. However, they are likely kicking holes in the ground now as those same puts traded up to 85 cents apiece after Macy’s announcement. Also, investors who earlier purchased 3,600 calls at the February 10.0 strike price at an average cost of 35 cents must be sore as those same calls have since been sold at a premium as low as 15 cents each. Still, at least one investor thinks that the capital reduction plan will pay dividends by May’s option expiration having used the slide in the share price this afternoon as opportunity to buy 10,000 calls at the 12.5 strike price for an average price of 43 cents. Still this investor is being pretty optimistic that Macy’s shares will rally by 52% from today’s price of $8.47 to the breakeven on the calls at $12.93 without any obvious signs that the recession is through.

EWJ – iShares MSCI Japan Index Fund. – With forecasts for a nasty turn down in the Japanese economy exacerbated by an ever-strengthening domestic currency, one questions why today an investor has placed a sizable bullish call position in the ETF replicating the major stock average. While shares are 0.4% lower at $8.40 the fund is still well off its 52-week low at $7.59 and with ongoing weakness in the driving U.S. indices the purchase of 20,000 call options expiring in less than three weeks sticks out. The only hint is the inexpensive premium of 15 cents per contract the investor paid to establish a fresh long position today. There is open interest of just 2,910 contracts at this strike. Perhaps this investor is growing fatigued with the downwards spiral of negative global news and expects a knee-jerk jump to help boost call premium. The trade requires a breakeven price for the ETF at expiration of $9.15, which is a mere 8.9% above today’s trading price. You never know quite how sentiment can turn and perhaps this is the investor’s strategy here on yet another red day for global stocks.

XLF – Financial Select Sector SPDR – Options plays today are heavier on the call side with a call to put ratio of 1.44. In the February contract 18,500 calls were purchased at the 10.0 strike price for an average cost of 45 cents, while at that same strike about 12,000 calls were sold for the same price. At the February 11 strike, over 23,000 calls were purchased for an average price of 22 cents, while 11,000 were sold for 22 cents. Also in February, 12,600 puts were sold at the 8.0 strike for a premium of 36 cents – perhaps this is a sign that some investors expect the financial gauge to remain above the 52-week low of 8.07. There were also large volumes of puts sold in the March contract. At the March 8.0 strike 11,500 puts sold for a VWAP of 70 cents, while at the March 9.0 strike 9,500 puts sold for an average premium of 1.18. Interestingly, over 7,000 calls were purchased at the June 12 strike price for 68 cents. Perhaps this is another sign of optimistic traders looking for recovery in the next six months for the financial sector.

ACOR – Acorda Therapeutics Inc. – The biopharmaceutical company popped up on our ‘hot by options volume’ market scanner this morning after one investor initiated a calendar spread in the July 2009 and January 2010 contracts. With shares trading down 3.75% at $23.61 today it appears that 3,500 puts July puts were written at a 1.70 premium at the 17.50 strike, possibly in the hope that while shares might be expected to decline, they would do so at an orderly pace. Meanwhile the same amount of puts were purchased for 4.00 apiece at the January ’10 17.5 strike. While it’s hard to pinpoint the strategy here, we speculate that this investor is trading the calendar to benefit from a worsening of the environment for the company as the year passes. The reading of implied volatility in the July series is 78% compared to a richer 93% in January 2010. In this case the position would benefit from a rise in volatility at far-dated contracts such that should shares continue to move lower the situation looks worse the further across the spectrum, which would boost the implied volatility of the long put position. We have no indication of whether the investor has a long or short position to play with in this case.

TWC – Time Warner Cable, Inc. Shares A – The cable operator edged onto our ‘hot by options volume’ market scanner today due to a 10,000 lot straddle initiated in July at the 17.5 strike price. It appears that one investor sold 10,000 calls for a premium of 2.55 and sold 10,000 puts for a premium of 1.80. Thus, the net gain from the position is equal to 4.35. It looks like this investor is utilizing TWC’s stable implied volatility and betting that its share price will remain within the parameters of the straddle established today. This individual will retain the premium of 4.35 as long as the share price remains within the breakeven points located at $13.15 and $21.85. Today shares stand at $18.20, having dipped slightly by 2% so far in Monday’s session.

GE – General Electric – Shares slid 3% today to $11.65 as sentiment towards GE in this tough economic climate continues to find anything remotely positive on which to pin hope. Option investors have once again driven GE to the top of our ‘most active by option volume’ market scanner by trading across many contracts. In the February contract, investors appear to be selling puts, possibly taking advantage of implied volatility readings at around 106% in the case of the 9.0 strike, where about 3,550 puts were sold for 26 cents. At the 10.0 strike around 5,700 puts sold for an average price of 47 cents, and at the 11.0 strike about 5,000 puts were sold for a VWAP of 79 cents. This put-selling trend continues across March, June, January ’10, and January ’11 contracts, as the premiums taken in grow increasingly large as contracts get further away from expiration. It could be the case that any investors selling short shares in GE are writing put premium in the expectation of enhancing yield (the strategy is the inverse of the covered call) and it also offers a way out if shares are ‘put’ to them in the event shares slip beneath the share price at expiration.

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