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Option Brief: J.C. Penney Company, Inc. (NYSE:JCP) gapped higher last Thursday, as investors and analysts applauded an upbeat sales forecast for 2014. While the shares are still 22% lower year-to-date, last seen at $7.13, options traders on Friday purchased calls to either gamble on more upside this week, or insure their short stock positions.
By Friday's close, JCP had seen roughly 59,000 calls change hands -- a slight 9% mark-up to the stock's average daily call volume. Most active was the out-of-the-money weekly 3/7 8-strike call, where more than 8,300 contracts traded, primarily at the ask price. Open interest at the weekly strike skyrocketed over the weekend, and the International Securities Exchange (ISE) underscores our suspicions that at least a healthy portion of the action was of the buy-to-open variety.
By purchasing the calls to open, the buyers have one of two motives: to profit from a rally north of $8 -- in territory J.C. Penney Company, Inc. (NYSE:JCP) hasn't explored since Jan. 7 -- by Friday's close, or to hedge a short position. In fact, short interest currently accounts for more than half of JCP's total available float, after rising 18.2% during the past two reporting periods. Whatever the motive, the shares would need to take out long-term resistance at their 80-day moving average in order for the calls to move into the money -- a feat not accomplished since July.