(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Macy’s stock could drop by over 11 percent, while JC Penney could fall by nearly 18 percent, and Sears could plunge as much as 22 percent. Those are steep declines for what has already been a terrible year for retailers. All three stocks are down by over 40 percent so far, with JC Penney down the most, over 61 percent.
The options set to expire on January 19, are suggesting big declines in the retailers’ share prices, despite what some are calling a better holiday shopping season. (See more: Why Macy’s, Nordstrom, Target May Rise on Holiday Sales.)
Put open interest in all three companies is heavy and suggest that traders are betting that the stocks of the three company will fall. Levels of implied volatility is also extremely high, which indicate the market is pricing in vast amounts of volatility, meaning stock price declines could be fast and sharp.
Macy’s options for the $20 strike show that 42,000 put contracts are currently open and are trading at a price of roughly $1.25. This suggests that shares of Macy’s would need to fall to $18.75, just for the options to break even, a decline of 11 percent.
The $21 calls have the largest open interest at only 17,000, which by comparison is a significantly smaller amount of traders betting the shares will rise.
JC Penney options have a significant amount of put open interest as well, with nearly 58,000 contracts open at the $3 strike, which are trading at roughly $0.30. This implies the shares need to fall to a price of $2.70 just to break even, a decline of 18 percent from the stocks current level of $3.30.
The $3 calls have only 10,000 contracts of open interest by comparison. The options in JC Penney also carry a very high level of implied volatility, at 83 percent. That is more than 10 times the S&P 500’s reading of 8.2 percent.
Sears options suggest the stock price could fall by 22 percent using the $4 strike price. The cost to buy one option is about $0.90, which means for the options to break even, they need to trade below $3.10, a decline of 22 percent.
The put open interest currently stands at 20,000 contracts, while the calls are only 444. The implied volatility reading is at 133 percent, an astronomical level compared to the S&P 500. (See also: Sears’ Holiday Survival Strategy: Slash Prices.)
The betting in the options market is overwhelmingly bearish in these three retailers, meaning the trio’s struggles are likely not over. (See also: Top Retail Stocks to Watch on Black Friday.)
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company’s actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer’s bio and his portfolio’s holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.
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