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Synthetic Shorts Macy’s (M) and JC Penny (JCP)

I’m betting on the death of retail.

music selection:  “Velcro Fly” — ZZ Top

weigh-in:  204.4 +1.6 – doh!

One of the surest trends in the market right now is the shift from brick and mortar to online retail.  The mall based retailers are hardest hit and most are going to zero.  The poster child for this is Sears Holdings (SHLD).  I looked into a short position there but found the pricing was prohibitive.  It is already a very popular short.  I found two names that are well suited to synthetic shorts and I’m jumping in.

Macy’s (M) continues to close stores and to see weakness in the top line.  A direct short does not work here because the borrowing rate is too high.  I’m going with a synthetic short instead.  I sold short M190118C00020000 for 3.875 a share.  I also bought M190118P00020000 for 3.775 a share.  My net credit is 10 cents a share and the trade will be in force for 495 days.  This position provides leverage but not in the same way as a direct short of the underlying as I did not receive the margin balance in cash.

JC Penny (JCP) is a hot mess.  Net income has recently been negative.  Aggressive cost cutting in 2016 resulted in a bottom line number for the year ending January 2017 to come to a measly 1 million dollars.  Free cash flow is negative for three years and the company is slowly bleeding to death.  I sold JCP190118C00004000 for 1.09 a share.  I also bought JCP190118P00004000 for 1.19 a share.  My net debit is 10 cents a share and the trade will be in force for 495 days.

These trades give me leverage and diversification in the form of negatively correlated assets.  It has been hard to be short during a raging bull market but I’m not going to give up on betting against truly miserable companies.

Devour your prey raptors!

{ 3 comments… add one }
  • Chris B September 12, 2017, 3:32 am

    Both good calls IMO. If you need a third idea, Dillards (DDS) will be next, although they are still modestly profitable and thus riskier to synthetic short. Nothing will stop the entire mall ecosystem from collapse in the end, though. And look at these prices…

    DDS current price: 58.06
    Jan 18, 2019 options —
    Last $50 call bid: $13.70
    Last $50 put ask: $8.80

    Tell me that doesn’t make a lizard’s tongue flicker.

    • Chris B September 12, 2017, 3:34 am

      Of course, the difference is JCP and M will collapse even if this is the Christmas when everybody discovers a nostalgia for physically going to the mall and Amazon reveals their numbers are all made up. DDS might survive that scenario.

    • The Lizard King September 12, 2017, 2:38 pm

      Thanks for the idea. I hadn’t even considered DDS. I’ll have to do some reading.

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