Downside positions cash in as $M falls

Soft guidance from Macy’s has resulted in significant gains for bearish option traders.

On July 20, Investitute’s proprietary programs identified the purchase of 4,100 August $22 puts for $0.70 to $0.73 with shares at $23.22. Volume was well above the strike’s open interest of 2,657 contracts, indicating that this was fresh buying.

Those puts traded for as much as $1.90 this morning, more than doubling in value. The stock fell 13.1 percent in the same period, showing how options can far outperform 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 was down 0.24 percent to $20.62 today, following a 10.25 percent drop in the previous session. The struggling department-store retailer surpassed expectations on the top and bottom lines yesterday morning but fell when its outlook was weaker than anticipated.