It’s time to mix and match your investment portfolio in retail stocks Macy’s Inc (NYSE:M) and Nordstrom, Inc. (NYSE:JWN), as a widening price spread in M and JWN stock sets up a nice opportunity for traders.
Let’s take a look at both department store chains on and off the price chart and offer an options-based pairs trade for capturing profits if a very hot M stock goes on sale, investors jump on board JWN stock’s forgotten merchandise or some combination of the two. Let me explain.
Retail Stock Short: Macy’s
So it turns out Macy’s wasn’t in the same predicament as a Sears Holding Corp (NASDAQ:SHLD) or J C Penney Company Inc (NYSE:JCP). A fairly menacing bear market from 2015–2017 which saw investors running for the exits in M stock courtesy of shifting buying habits in an Amazon.com, Inc. (NASDAQ:AMZN) driven world has been replaced with an increasingly optimistic, “oops, we overreacted” show of conviction from Wall Street in 2018.
But now the department store giant has become a bit too trendy for its own good. The shopping spree has taken M stock up nearly 60% year-to-date and at increased risk of a markdown based on an overbought chart into resistance at the 50% retracement level.
Also worrisome, there was even upgrade from a bear this past week. Evercore ISI is now convinced Macy’s has figured out a digital strategy worth buying into.
M Stock Options Strategy
Reviewing the options market in M stock, one strategy which takes advantage of an anticipated pullback within a moderately bearish range is the July $36/$34/$32 put butterfly.
With shares at $39.88 the combination is priced for 15 cents, or about 0.40% of the risk associated with shorting Macy’s. That’s a nice insurance policy with good coverage. The spread is profitable in between $32.15 and $35.85 and enjoys a very nice max profit capture of $1.85 if M stock lands at $34 on expiration.
Lastly, if an overbought condition is worked off in the coming weeks and the trader turns bullish in light of a stronger technical setup, the low price of entry for the butterfly means even if a profit isn’t available; buying M stock at a healthy and nicer-looking discount is certainly a possibility.
Retail Stock Buy: Nordstrom (JWN)
Unlike M stock, shares of fellow department store operator Nordstrom haven’t enjoyed nearly the change in buying habits from investors this year. Shares are up a not-too-shabby 11%, but 2018 has been mostly defined by indifference from those shopping — and those dropping — JWN stock.
The good news is the technical ennui this year has been very constructive for shares of Nordstrom. JWN stock is now breaking out from a choppy lateral consolidation centered on a key downtrend line and the 200-week simple moving average. The provided weekly view of JWN also shows a very supportive, bullishly divergent stochastics set-up.
JWN Stock Options Strategy
Reviewing the options market in JWN stock, I’m a fan of a butterfly strategy once again. This time though, I’m looking at a moderately bullish July $55/$60/$65 call combination to capture profits from a breakout with some decent, but not over-the-top follow-through in the weeks ahead.
With shares of JWN at $52.47 the butterfly is priced for 55 cents. That amounts to roughly 1% of the risk of going long Nordstrom stock.
In the event shares fail to make good on the breakout — or worse yet, breakdown — exposure is limited to the small debit. If all goes according to plan, this $5 wide butterfly offers some serious upside profit capture from $55.55 to $64.45. And if everything goes picture perfect, the sweet spot at $60 offers a payout of $4.45 if JWN stock lands on the sold strike at expiration.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
