Macy's blockbuster quarter was costly for traders guarding against the retail apocalypse

Macy's reported strong quarterly and full-year 2017 earnings on Tuesday, sending its stock soaring as much as 13%.
The share gain was bad news for Macy's bears, who had increased bets against the company heading into the report.

Amid repeated warnings that the retail industry is on the brink of an apocalypse, you can hardly blame investors for protecting themselves. The only problem is, when the sector shows signs of life, those downside hedges can become a waste of money.

It's a lesson Macy's skeptics learned the hard way on Tuesday, after the company reported fourth-quarter and full-year earnings that smashed Wall Street estimates and sent the company's stock soaring as much as 13%.

In the weeks ahead of the earnings report and its associated stock spike, investors were paying the highest premium in a year to protect against a decline in Macy's shares over the next three months, relative to bullish bets, according to Bloomberg data. The measure — known as skew — can become elevated during times of worry as traders start to pay up for hedges.

Another group of Macy's pessimists — short sellers — found themselves similarly ill-positioned for the company's stock spike. They boosted short positions, or wagers Macy's shares would drop, by roughly $250 million (27%) in the six months leading up to the earnings report, according to data compiled by financial analytics firm S3 Partners.

Including Tuesday's gain, Macy's is now up roughly 20% this year — hardly the type of performance that makes money for short sellers. For the time being, it would seem retail apocalypse enthusiasts are best off placing their pessimistic bets elsewhere.

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