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J.C. Penney Company, Inc. (NYSE:JCP) continues to dominate the news cycle -- late last week, for example, the troubled retailer announced plans for a secondary public offering. Meanwhile, 30-day, at-the-money implied volatility in the JCP options pits has spiked from 47.3% on Sept. 19 to 88.3% currently. Options players are taking full advantage of this landscape, driving up volume across a host of JCP strikes.
On Friday, JCP was the second-most active equity among options players, with about 565,000 contracts changing hands, or more than 4.5 times the average daily volume. Trading activity was heavy across a number of strikes (calls and puts, long-term and short-term), but the largest block trades of the day crossed on the January 2015 10- and 15-strike calls in late-afternoon activity.
Symmetrical blocks of 16,500 contracts each traded on these LEAPS options, with the 10 calls going off at the ask price of $2.47 per contract, while the 15 calls traded at the bid price of $1.10 apiece. Based on spikes in open interest -- and data from the International Securities Exchange (ISE) -- it appears as though a firm bought to open a long call spread as a relatively low-cost way of betting on a long-term recovery in JCP shares.
The spread buyer is essentially looking for JCP to rally north of the 10 strike within the next 15 months or so, but ideally surge no further than the $15 level, where profits on the spread are maximized. Looking ahead to January 2015 expiration, the spread will be profitable if JCP is trading above $11.37 (the long strike, plus the net premium paid). If the stock is still trading below $10, the trader will lose 100% of this premium. Finally, due to the short call, gains are capped above the 15 strike at $3.63 per spread, or the difference in strike prices less the premium paid.
It's not surprising that JCP has attracted the attention of short sellers, as well. Nearly 67 million JCP shares are sold short, amounting to a brow-raising 76% of the stock's available float. It's possible, then, that Friday's long call spread buyer (and others betting with out-of-the-money JCP calls) are looking for ways to hedge their bearish bets. Today, amid more negative attention from Wall Street, J.C. Penney Company, Inc. (NYSE:JCP) touched another decade-plus low of $8.59, and is now sitting at $8.98.
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