Macy’s has been on a roll this year, up nearly 40% over the past seven months. Like many traditional retailers, Macy’s became oversold last year on fears that Amazon would eventually drive it out of business. But that hasn’t happened, and now the stock market is trying to figure out what its fair value really is.

Apparently, some investors don’t believe Macy’s can hold its recent gain based on the pricing of its options. In particular, the implied volatility of most of the November put (and call) options is greater than 40%. That gives us the opportunity to write a put option with an immediate yield of better than 8% (option premium divided into the strike price) for only a four-month holding period.

It seems the market is repeating the same mistake that it made with Best Buy, Target, and other retailers that have consistently delivered strong quarterly results after proving their naysayers wrong. I believe Macy’s will follow suit and live up to the increased guidance it provided in May for the remainder of 2018.

Based on those numbers, Macy’s is currently valued at roughly ten times forward earnings. That multiple is about 50% less than the average large-cap stock, and 40% less than for Target and Best Buy.

This trade will generate immediate income of at least $300 per contract now, with the possibility of buying Macy’s stock at a discount to where it currently trades if it gets put to you. Investors should set aside $3,500 per contract sold to buy the stock in case the option expires in the money.

Regardless of how many contracts you sell, it’s absolutely critical that you follow the instructions below, particularly when it comes to setting the limit order.

How to Make the Trade:

• Trade: Sell to open the November 16, 2018, $35 Put on Macy’s (NYSE: M).
• Symbol: M181116P00035000
• Allocation: Sell one put for every 100 shares you would be pleased to buy at $35 per share.
• Prices:
  • Current Stock Price: $36.25
  • Limit Order Price: a credit of $3.00 or more.
  • Tell your broker: “I want to sell a put on Macy’s stock. Specifically, I want to ‘sell to open’ one November $35 Put for a credit of $3.00 per share or more.”

• Further Instructions Regarding the Trade:
  • If the option price changes, you can adjust our recommended limit based on the midpoint of the bid/ask spread, which you should be able to see when entering the trade. Just make sure the potential credit is at least $3.00 per share or more.
  • Place your limit order on a “good ’til canceled” (GTC) basis and be patient.

The Win-Win Situation:

For every put contract you sell, you will collect at least $300 that’s yours to keep no matter what happens in the future.

If the put expires worthless, meaning the stock price is above $35 per share at expiration, then we’ll do another trade to create another instant payment.

If the stock is trading at or below the strike price upon the contract’s expiration, then you’ll be buying Macy’s at a discount to its current market price, while locking in a yield of 4.1% – plus the premium you pocketed when you sold the put.

Then, we’ll collect the dividend while creating more instant payments by selling covered calls against the stock.