The Balance of Trade Derivatives Strategy, trading, portfolio strategy, Educational Focus The Balance of Trade Summary Many investors shrug off the options market as a place where gamblers or traders place their bets. The fact of the matter is that the options market can offer you as an investor insights about the stock you are considering, even if you do not trade them. Looking at (and understanding) an options chain can help you mentally parse through why you are contemplating a stock purchase. Intro disclaimer: The friend I mention below, “Jack”, is a real person. I’ve changed his name to keep him anonymous, and while there are no details pointing directly to him, I got his permission to write about his Macy’s experience as we both agreed it could be helpful for investors. Thesis: Considering individual stocks from the perspective of optionality and implied volatility can add a dimension that helps serious investors evaluate their opportunity set with respect to ‘Buy, Hold or Sell’ decisions. Those looking to get long Macy’s (M) might benefit from asking exactly ‘how’ they see the benefits accruing (the steady accumulation of an attractive dividend stream and a stabilizing market vs. a strong rebound on an undervalued asset). Macy’s is a cherished American name brand with a storied history and a broad customer base. Founded in 1858 as R.H. Macy and Co., there are some who question whether the company will be able to survive the onslaught of online retail. The main thrust of this paper is not to argue whether Macy’s currently represents a strong holding for investor portfolios. The reason I chose to cover this stock is because I heard some pretty compelling arguments for owning it from a close friend of mine a couple years back (we’ll call him “Jack”). Jack is highly knowledgeable about large cap stocks and never invests without having first conducted a good deal of analysis and research from a variety of sources. This is what he got for his trouble: To be clear, Jack didn’t simply sit on his hands the whole way down on Macy’s. He dollar-cost averaged in and also sold on some of the stronger moves higher, as is in keeping with his discipline. He recently told me he has been out of the position for the last eight points lower or so, but he is considering getting back in with the shares trading around $20. The fact remains, however, that while the tactics of how my friend has positioned in Macy’s may have helped him, the overall “Buy” decision has not. If you’re an investor with any experience, you are likely well acquainted with this kind of outcome as the reward for your hard work. I like to paraphrase the Apostle Paul on this matter: For I do not understand myself on this matter, for the trades/investments I should take I do not take, but the trades/investments that I should not take, those I take.- Romans 7:15 No One Tool Works All the Time Jack likes to dig into a company’s financials, learn about its management and their strategy, and considers leverage and economic moats. He has a value focus as an investor, and likes to invest in companies with which he is familiar and whose businesses he feels he understands. This is a reasonable strategy, and in the aggregate, it has worked fairly well for my friend. Now, when I asked Jack a couple years ago why he wanted to buy the stock, he mentioned it was because he really liked the idea of a stable company with a reasonably attractive dividend. I asked him back then how long he planned to hold, and two+ years was his response. Jack doesn’t like to get too cute with darting in or out, especially when a position is working for him. If a particular holding does not work the way he’d like, he’s open to trying a couple different tactical approaches, as mentioned earlier. The problem is that the dividend got juicier and juicier, and not for the right reasons: The irony, and you certainly know what I mean if you’re a dividend or a value investor, is that the lower the share price goes, usually the higher the dividend yield or the more attractive the position from a valuation standpoint. Certainly this is not always the case, as dividends can be cut or fundamentals can sour (as they arguably have in Macy’s case). Still, the fact remains that in many cases, the old saw about “If you liked it at $30, you must love it at $20” is a difficult issue for value and/or dividend investors to grapple with. Takeaway: No one approach always works. Every lens we can use to gauge the attractiveness of a stock can and does carry the potential to lead us astray. The sooner we realize that, the sooner we are likely to develop humility and accept that a variety of approaches may carry validity in their own season. Other Ways To Skin The Cat Market technicians are quick to offer insight as to the viability of an investment; this link shares a brief technical view on why one should get long Macy’s. We can look at market measures such as beta to get some notion of how sensitive the stock is likely to be to changes in some associated index such as the S&P 500 (SPY): Alternatively, one can look at the attractiveness of the dividend yield in relation to a benchmark such as the US 10-Yr Treasury: In Part II, we will examine a couple other approaches that might qualify as Fundamental Analysis that can aid investors to determine whether an investment makes financial sense for their portfolios. A Different Perspective Can Help You Spot Danger And Target Your Outlook Source: MarketChamelion Above is the implied volatility on options for Macy’s vs. the S&P 500 Retail Sector ETF (XRT) over the last year, as reported by Market Chamelion. Naturally, it is common for a single stock to trade at higher levels of volatility than a basket of holdings, as there is no diversification benefit to the single stock. Still, over the last year, we have seen some very high levels of implied volatility on Macy’s options. For those who believe that the company is a "stalwart of the economy", stable and dependable, the implied vols frequently trading over forty could have acted as a red flag. This observation is especially true during a time when the broader stock market has seen volatility hit its lowest levels on record: Understanding the historical and realized volatility of an investment are worthwhile pursuits for a few reasons, two of which we will address in this series. Strategic Considerations: Screening When you are analyzing a holding, you should be just as interested in the risk profile as the return profile. Furthermore, risk tends to be more autocorrelated than returns, which is to say that the recent range of realized volatilities tend to be reasonably related to past historical volatilities. It goes without saying that this is not an iron clad rule, as the volatility associated with returns can and does fly higher or thud lower for any number of reasons. We believe understanding what the options market is telling you about forward-looking volatility is a worthwhile venture in conjunction with other metrics or forms of analysis on gauging the potential when considering an investment from a strategic standpoint. Monitoring: It is tempting to believe that if an investor is regularly looking at volatility characteristics, they must be a market timer. While this may be true, it is not always the case. There are a variety of reasons to monitor one’s investments: What is the current dividend yield… beta… Altman’s Z-Score… credit rating? Is the management team executing on their strategy in the way that I thought they would when I bought the stock? Which products are currently driving sales and profits, and how are the financials behaving? Now we recognize that there is a school of thought that goes “Buy and Never Sell”. If that’s you, then there really is no monitoring involved once you buy. I am not here to argue with you (though I’m sure it won’t be difficult for you as a buy-and-hold-forever investor to find any number of investors who will debate you on the topic.) Periodically checking in on your investments from a number of vantage points to determine if you are still holding them for the right reasons is not rash, nor does it make you a ‘day-trader’. That makes you a strategic allocator of capital. Looking at implied volatilities for your companies, and comparing them with reasonable benchmarks, is one of several prudent methods of keeping an eye on your individual holdings: Monitoring the implied volatility on your holdings is just as important as checking on Revenue or Profit Margin figures. By no means do they act as a crystal ball, but then again nothing does. We believe that checking on the current volatility levels and/or correlations of a holding can help you assess whether the investment is still a strong decision to maintain ownership of an individual company instead of holding a benchmark or some other alternative (in this case, why specifically own ‘M’ instead of the more broadly diversified ‘XRT’?). Tactical Considerations: There are a couple valid and important ways to consider how a share's options chain allows you to focus your attention on why you believe its prospects to be attractive. Really, when you consider buying a company, there are two major reasons: stability and an adequate dividend, or else meaningful upside potential. Understanding the state of the options market gives you some sense of how you could go about getting the exposure that matters most to you (i.e., the dividend or the upside), with the ability to invest accordingly. For Example: Let’s just suppose for a moment that you are interested in buying 1,000 shares of Macy’s. Furthermore, you have little intention of modifying your position with great regularity, and so we will assume little or no modification on an options strategy. Case I: “In it for the Upside” For the benefit of pure simplicity, let us go with the most basic of all strategies here: buy ten of the near-the-money call (we’ve selected the February 16th call, as it is a mid-dated option that is still fairly liquid): Look specifically at the visual, as well as the third row of the Matrix (Row “Delta”). Clearly, the more Macy’s appreciates, the more participation you experience as an owner of the calls. On the other hand, if you happen to be wrong about the stock like my friend Jack was, then the more the stock drops, the less (unwanted) exposure you have to its shares. In Case I, you do not so much care about the Macy’s dividend, which you will not receive as a holder of the calls rather than a holder of the shares. But what you lose in dividends, you arguably gain back on two fronts: Cheap calls (with respect to strikes near the money): The higher the dividend, the cheaper the call and the more expensive the put. We’ll get into this in a future piece, but for now suffice it to say, it is based on the action of the market maker who buys from or sells to you: your counterparty. To make this brief, if you buy a call, then the market maker sells a call. To offset their exposure, they immediately buy “delta” M shares: in the case above 482 (see row “Delta”, column (“Current”) and multiply by 100x). This way, if the share price rises, they are hedged on the call they sold you. But because they now hold the shares, they would collect any dividends that take place and will reduce the price of the calls accordingly. The same basic argument goes in reverse if you choose to buy a put. To be very clear, “cheap calls” have much more to do with implied volatility levels relative to your belief about what they should or shouldn’t trade at. The fact remains, however, that a large dividend makes corresponding calls less expensive and renders puts pricier. Risk Management on Autodial: If M shares crash, you’re out the price of the call. In fact, the more M shares fall, the less and less long exposure you have to the shares (look across Row “Delta” in the table above). One last point here: notice that we are comparing investing in 1,000 shares of Macy’s outright vs. 10 Macy’s calls. The percentage move in the calls are much greater than the underlying (paying $20 for the shares vs. less than $1.50 for the calls), but the absolute moves in the calls are smaller. Consider that for every $.01 move in Macy’s, the thousand shares would rise or fall by $10. At the point of purchase, the delta on the ten calls stands at $4.82, which is to say that a $.01 move in Macy’s shares will result in only a $4.82 move in the call (as opposed to $10 for the 1000 shares of stock). If Macy’s moves higher, so does the delta. If Macy’s moves lower, then once again so does the delta. By way of contrast, no matter how high or low the share price moves, the 1,000 shares purchased will always result in a $10 financial impact on the owner for every $.01 move in the shares We will consider the other case ("In it for the Dividend") in Part II. Now, of course, there is more to buying or trading options than looking at one table and buying or selling one option. That is not what we are arguing. What we are saying is that if you are interested in owning a company’s shares, there is usually a dominant reason. It is almost impossible to imagine that every time you go to buy a stock, you would somehow naturally choose the exact same mix of exposures (delta, gamma, theta, vega) each and every time if you had to choose. But whenever you buy a share of stock, that is exactly what you do (delta=1, gamma=0, theta=0, vega=0). As an analogy, choosing to buy all your exposure through going long stocks is somewhat akin to eating all your food with a spork. Sure, more often than not it gets the job done. But with not that much extra training, you can learn how to “eat” with instruments that are more individualized to the particulars of your situation. Conclusion We fully acknowledge that due to time, tax, commission and bid-ask considerations, just going out and buying the stock can be the best decision for stock investors some or even all of the time, depending on their individual circumstances. We will not argue that point. But we will say that strategically, they can give you a lay of the land and offer a sense of the current perceived levels of risk associated with a particular investment (via looking up implied volatilities). Furthermore, options and their associated implied vols can act as an effective way of checking in on one’s positions, even if you ultimately decide that investing in options is not for you. Tactically, if you are so inclined, you can better match your purchase or sale with your rationale for purchase. In this piece, we considered the investor who really believed in Macy’s upside potential, and offered up the simplest of options strategies as a way of executing that thesis. We began this discussion saying that nothing works all the time. There are no iron-clad guarantees in investing. Additionally, options frequently do involve more monitoring and adjustment than many are comfortable with. They also require some reasonably involved education (though probably quite a bit less than many suppose). Still, even if you decide to avoid options altogether, the information embedded in the volatility markets can offer up valuable insights to those who have or are considering a position in a given security whenever options are traded with reasonable liquidity. In the next piece, we will explore further how understanding volatility can be a useful tool to possess, and we’ll consider the benefits of gaining exposure to Macy’s stock through selling the near-the-money put rather than buying the near-the-money call.
Report: Macy's has buyer for Chicago flagship Cincinnati-based retailer Macy's Inc. has reportedly found a buyer for its iconic flagship store, which was formerly Mashall Field's. Cincinnati-based retailer Macy's Inc. has reportedly found a buyer for its iconic flagship store, which was formerly Mashall Field's. Photographer: Tim Boyle/Bloomberg News By Andy Brownfield Reporter, Cincinnati Business Courier Oct 25, 2017, 2:49pm EDT Updated Oct 26, 2017, 7:16am EDT Chicago's largest newspaper reports that Cincinnati-based retailer Macy's Inc. has found a buyer for its iconic flagship store, which was formerly Marshall Field's. The Chicago Tribune reports that Macy's (NYSE: M) has a deal to sell the top floors of its Chicago flagship to Toronto-based Brookfield Asset Management. The deal, which the newspaper attributed to anonymous sources, has not been finalized and no price was listed. The name should be familiar to followers of the Cincinnati department store giant. Macy's already has an agreement with Brookfield Asset Management to redevelop up to 50 of its properties. The deal gives Brookfield two years to come up with a "pre-development plan" for 50 of Macy's ground-leased stores and the associated land with an option to add more properties to the deal. Most of those stores are in malls that are not owned by major mall owners. Macy's put the top half of its downtown Chicago store up for sale and expects to gain as much as $130 million. The former Marshall Field's building is a Chicago icon with a loyal activist following that would like to see it returned to operation under the Field's banner. The potential sale of the building's top floors fits in with Macy's overall real estate strategy, which has evolved in the past year since activist investor Starboard Value tried to get the retailer to monetize its real estate. Macy's plans to monetize its four flagship stores: Herald Square in New York, Union Square in San Francisco, State Street in Chicago and downtown Minneapolis. Macy's announced the sale and closure of its downtown Minneapolis flagship on March 1 and sold its separate men's store at Union Square for $250 million. It's consolidating that store back into the main flagship Macy's at Union Square but will lease the men's store for two to three years during that process. Macy's operates 829 stores under the nameplates Macy's, Macy's Backstage, Bloomingdale's, Bloomingdale's Outlet and Bluemercury, primarily in the United States. The company employs about 3,800 in Cincinnati between two offices, a Mason call center and seven retail locations.
Hmmm. They beat earnings, up'd guidance. SSS's came in a tad below expected. No mention of a dividend cut. Announced the closing of some stores.... Laguna Hills Mall in Laguna Hills,CA....Stonestown Galleria in San Fran... and Westside Pavillion in LA. Those sound like they sit atop pretty pricey real estate. Not sure though. As long as they don't cut the dividend in the conference call.... should be safe around $17 for a long play. I'm in pre market at $17 and change.
How much does that parade cost? They better cut that parade before they cut the dividend. If people want their brats to see a parade...stay home and watch the prior years on YouTube. They're all looking at their phones anyway; not the floats. Pilgrims gave the Native Americans syphilis and then proceeded to steal their land. I hate holidays that close the markets. Humbug.
There are 100 more Macy's backstage discount stores will be opened this year. Macy’s sustained focus on price optimization, inventory management, merchandise planning, and private label offering are the primary catalysts, facilitating in meeting customer-oriented demand and improving in-store shopping experience. In an attempt to increase sales, profitability and cash flows, Macy has been taking steps such as integration of operations as well as developing e-commerce business and online order fulfillment centers.