Options Pro On Macy's Breaks Down Potential 500% Return Trade

Retailer Macy's Inc M faces multiple headwinds ahead, including liquidity issues, a slashed dividend and $1.5 billion in new debt taken from its revolver, OptionsPlay Chief Strategist Tony Zhang said on CNBC's "Options Action." None of this implies the company is going bankrupt, he said.

Macy's Down 67% This Year 

The retail landscape is divided into two groups: those who invested in a digital strategy and presence versus those who didn't, Zhang said. In Macy's case, the company prioritized growing same-store sales to generate revenue growth, and the stock's 67% decline since the start of 2020 reflects this reality, he said. 

The SPDR S&P Retail XRT ETF rebounded around 30% from its lows, while Macy's stock is not far removed from its own 52-week lows, Zhang said. 

A 'Tricky' Macy's Options Trade 

Playing options on low-priced but "severely oversold" stocks like Macy's is "very tricky" because the strike prices are far apart, forming a percentage perspective, he said. But that doesn't mean a trade can't be made.

Zhang's trade consists of buying one contract of the June $3 puts and buying one June $5 put while also selling two contracts of the June $4 puts.

Net, net this put butterfly strategy costs just 17 cents, or 3.5% of the underlying stock price.

Zhang's Macy's Strategy

Zhang's strategy will become profitable if Macy's stock dips below $4.83 and will remain profitable all the way to $3.17. If the stock closes at $4 when it expires in June, the return on the strategy will be around 500% on a mere 17-cent investment.

Macy's shares were up 2.39% at $5.14 in Monday's premarket session. 

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