Nimble traders score on $M puts

Option traders made big money as Macy’s rallied recently, and today they showed how to profit on the downside as well.

On Aug. 13, Investitute’s proprietary programs flagged the purchase of 2,000 August $39.50 puts for $1.53 as part of a bearish spread with shares at $40.01. This was clearly a new position, as open interest in the strike was only 511 contracts before the trade occurred.

Those puts traded up to $4.28 today, nearly 3 times their purchase price. The stock fell 11.57% in the same time frame, underscoring how quickly options can far outperform moves in their underlying shares.

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 dropped 15.95% to $35.15 today. The department-store operator had been rallying with bullish option activity ahead of its quarter report this morning but pulled back despite beating estimates this morning.