$M bears double their money

A large downside trade opened in Macy’s just before Christmas has paid off in a big way.

On Dec. 21, Investitute’s tracking systems flagged the purchase of 25,000 January $27 puts for $0.89 as part of a bearish spread with shares at $29.12. This was clearly a new position, as volume was far above the strike’s previous open interest of 10,650 contracts. Investitute co-founder Pete Najarian cited the unusual activity at that time on CNBC’s “Halftime Report.”

Those puts traded for $1.89 today, more than twice their purchase price. The stock fell 12.29% in the same time period, showing how options can far outperform moves in their underlying shares on a relative basis.

Long puts lock in the price where a stock can be sold no matter how far it might drop, gaining value in a selloff with the potential for significant leverage. The contracts can be purchased either as an outright bearish bet or a hedge on a long-stock position.

M plunged 17.69% to $26.11 today. The department-store operator reported weak holiday sales and lowered its outlook this morning.