It’s probably the oddest financial news story in recent memory. Just prior to department store giant Macy’s (M) revealing its third-quarter earnings results, management disclosed that a former employee concealed up to $154 million in delivery expenses over nearly three years, starting in late 2021. The announcement startled investors, leading to a sizable drop in M stock.
According to Barchart content partner Associated Press, “[a]n independent investigation and forensic analysis found that a single employee with responsibility for small package delivery expense accounting intentionally made erroneous accounting accrual entries to hide roughly $132 million to $154 million of expenses from the fourth quarter of 2021 through the fiscal quarter ended November 2.”
During this period, Macy’s recognized approximately $4.36 billion of delivery expenses.
Obviously, the matter is arriving at an unfortunate time. On Tuesday morning, the department store was scheduled to disclose its Q3 results before the opening bell. Against a broader framework, Macy’s has been striving to boost its business amid a competitive retail environment. Under current CEO Tony Spring, the company is focusing on closing underperforming stores and enhancing customer experiences.
Despite the embarrassment, it’s also possible that the bad news has already been baked in. Generally speaking, the retail environment has witnessed positive results, highlighted by Walmart’s (WMT) recent earnings beat. Further, the smart money seems to be viewing the red ink in M stock as a buying opportunity.
Monday’s Options Flow Smiles on M Stock
Predictably, M stock represented one of the aberrancies in Barchart’s unusual stock options volume indicator. This screener showcases optionable securities that witnessed trading volumes either significantly above or below normal levels. In other words, this informational hub shows you what the smart money may be buying or avoiding.
With M stock, total volume reached 83,629 contracts against an open interest reading of 338,724 contracts. The difference between Monday’s volume and the trailing one-month average metric came out to 289.88%. Interestingly, call volume stood at 46,299 contracts versus put volume of 37,330. On paper, the ratio landed at 0.81, favoring the bulls.
Of course, it’s important to understand that options are two-way streets: for every option bought, that same derivative is sold. Therefore, retail investors should understand who is doing the buying and selling. That’s where options flow data comes into play, which focuses exclusively on big block transactions likely placed by institutional investors.
This screener shows that net trade sentiment stood at $515,100 on Monday, significantly favoring the bulls. In total, bullish transactions measured $678,000 compared to bearish transactions reaching $-162,900. Notably, the top two bullish transactions were for out-the-money (OTM) $17 calls, one expiring Dec. 20 ($170,700 total premium) and the other expiring Jan. 17, 2025 ($50,100).
Given that these are apparently net debit strategies, it’s the smart money that sees M stock eclipsing $17 (strike price plus the premium) relatively quickly. For the adventurous retail investor, it might not be the worst idea to consider a speculative wager.
Breaking Down the Bull Call Spread
Based on Barchart’s Expected Move calculator, M stock potentially has the capability of reaching $17.78 by the expiration date of Dec. 20. This price target tracks with the options flow data of big money players targeting the $17 calls. Potentially, you could just buy Macy’s shares now for $15.94 and if it reaches $17.78, sell for an 11.54% return.
There’s also another way to play this game and that’s with the bull call spread. Suppose you bought the $14 call (with a time-of-writing ask of $2.31) and simultaneously sold the $17 call (bid of 52 cents). You could use the credit received from the short call to help offset the debit paid for the long call. This action would also lower the breakeven threshold from $16.31 to $15.79, which is lower than the current market price.
Under this trade, you would be putting $179 at risk. However, if M stock manages to hit or exceed $17 by the expiration date of Dec. 20, you could see a gain of $121 or a potential maximum payout of 67.6%. That’s a relatively conservative idea among bull call spreads. You may choose other strike price combinations to boost your reward potential in exchange for greater risk.
Either way, if you’re really confident about M stock making a comeback, the bull call spread is tempting. You can make a small double-digit return or swing for the fences for a much bigger reward.
