It’s no secret brick-and-mortar retail sector has been destroyed by Amazon.com, Inc. (NASDAQ:AMZN). Companies like Macy’s Inc (NYSE:M) struggle to survive in the age of Amazon. The shopping trends have gone online and retailers scramble to keep afloat.
M stock is now a fraction of what it once was. It’s down 70% in two years and, more disturbingly, down 50% since last November. The S&P 500 gained 7% during the same time. The retailers should blame themselves for most of this. They’ve had a decade to prepare for Amazon, but they waited until the last minute. Mistakes happen when backs are against the wall.
And even now I am not convinced they’ve solved that riddle. Experts tout the growth of their online efforts as improvements. I’d say it’s a shift, not growth, resulting in the cannibalization of sales. In Macy’s case, however, it’s still running a profit. It has time to stop the slide, but management will have to get more creative rather than just shift to online sales.
Click to Enlarge Fundamentally, the valuation for M is not outrageous. It sells at a trailing price-earnings ratio of 11 and a price-book of 1.6. But considering its growth struggles, I’d rather own a bank. However, I’ll gamble a few bucks on Macy’s price action for profit.
Today, I want to sell put with room to spare, so I can try to generate income out of thin air. I will have no out-of-pocket expense, but there will still be risk. By selling the put, I commit to owning the shares, but at a lower price.
The Bet: Sell the M stock Nov $17 put and collect 80 cents per contract to open. Here I have a theoretical 80% odds of success, but if price falls below my strike I would accrue losses below $16.20.
Selling puts especially in a deteriorating business is not ideal. So for those who prefer less risk, I would sell a spread instead.
The Alternate Bet: Sell the M stock Nov $17/$16 bull put spread where I have about the same odds of winning, but with a smaller amount at risk. The spread could deliver 20% in yield. This is better than buying the stock outright here and expect a rally. With either of these setups I have a 16% buffer.
Investing in the equity markets carries risk, and for that reason I never risk more than I can lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.