Macy’s shellshocks investors with dividend cut

Today’s tickers: M, EWJ, XLF, ACOR, TWC & GE M – Macys Inc. – Macy’s strategy, announced this afternoon, created a whipsaw reaction for options traders. Macy’s revealed a major slash to their quarterly dividend, lowering payouts to 5 cents down from 13.5 cents. The department store has also proposed drastic cost cutting measures including the elimination of 7,000 jobs and a cessation of new hiring for the time being. Option traders responded quickly to the news by piling into puts in the February contract at the 5.0 strike where 1,400 were purchased for 20 cents. Implied volatility jumped immediately by 14% to 110% in light of the new information. The announcement must have left some traders looking for new shoes to scuff thanks to the earlier trading pattern in which we saw put sellers taking in premium at February 7.5 strike for 30 cents, at which time they perceived little risk of shares falling. However, they are likely kicking holes in the ground now as those same puts traded up to 85 cents apiece after Macy’s announcement. Also, investors who earlier purchased 3,600 calls at the February 10.0 strike price at an average cost of 35 cents must be sore as those same calls have since been sold at a premium as low as 15 cents each. Still, at least one investor thinks that the capital reduction plan will pay dividends by May’s option expiration having used the slide in the share price this afternoon as opportunity to buy 10,000 calls at the 12.5 strike price for an average price of 43 cents. Still this investor is being pretty optimistic that Macy’s shares will rally by 52% from today’s price of $8.47 to the breakeven on the calls at $12.93 without any obvious signs that the recession is through. EWJ – iShares MSCI Japan Index Fund. – With forecasts for a nasty turn down in the Japanese economy exacerbated by an ever-strengthening domestic currency, one questions why today an investor has placed a sizable bullish call position in the ETF replicating the major stock average. While shares are 0.4% lower at $8.40 the fund is still well off its 52-week low at $7.59 and with ongoing weakness in the driving U.S. indices the purchase of 20,000 call options expiring in less than three weeks sticks out. The only hint is the inexpensive premium of 15 cents per contract the investor paid to…