Stocks quoted in this article:
The shares of J.C. Penney Company, Inc. (NYSE:JCP) are up 6.9% at $14.14, thanks to the retailer's well-received turn in the earnings confessional this morning. Against this backdrop, one options trader is either gambling on a pullback for JCP, or is protecting his shares in the event of an about-face.
Overall option volume is high so far today, with 88,000 calls and 139,000 puts exchanged, compared to JCP's average intraday volume of about 24,000 calls and 43,000 puts.
Within the first 15 minutes of trading, the aforementioned speculator bought a block of 5,000 November 12 puts to open for the ask price of $1.02. And while the stock's near-term option prices are plummeting in the wake of deflated implied volatility (IV) -- JCP's 30-day, at-the-money IV is down 23.1 percentage points at 61.1% -- the bear lowered his cost of entry (and his maximum risk) by selling to open an equal number of November 9 puts for the bid price of $0.32.
By constructing a bear put spread for a net debit of $0.70 per pair of options, the trader will begin to profit if JCP breaches $11.30 (bought put strike minus net debit) -- a 12-year low -- before November options expiration. From the stock's current perch, it would take a retreat of 20% in order to hit breakeven. However, while the sale of the 9-strike puts reduced the net debit (which doubles as the maximum risk on the trade), it also caps the trader's profit potential at $2.30 (difference between strikes, minus net debit), no matter how far JCP should fall south of $9.
As alluded to earlier, it's possible that the spread was implemented as a relatively low-cost way to protect JCP shares. If the speculator purchased the shares at the current price today, the spread merely locks in an acceptable price at which to unload the stake -- $12 per share, in this instance -- should JCP give back today's gains. The trader's primary goal remains for JCP to continue its upward momentum.
Even before today, though, JCP was a popular target among option bears. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open more than two JCP puts for every call during the past two weeks. The resulting 10-day put/call volume ratio of 2.06 sits just 12 percentage points from an annual high, hinting at a healthier-than-usual appetite for long puts relative to calls recently.
In the same skeptical vein, short interest soared 23.3% during the past two reporting periods, and now accounts for a whopping 43.8% of JCP's total available float. At the stock's average pace of trading, it would take more than a week to repurchase all of these pessimistic positions. Plus, just five out of 17 analysts consider JCP worthy of a "buy" or better endorsement.
Taking a long-term look at the charts, it's no surprise to find Wall Street in the bears' corner. J.C. Penney Company, Inc. (NYSE:JCP) has underperformed the broader S&P 500 Index (SPX) by more than 26 percentage points during the past three months, and has surrendered almost 29% in 2013. While the shares are trending higher today, they're still struggling to surmount their 20-day moving average, which hasn't been conquered on a daily closing basis since July 16.