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Yesterday afternoon, J.C. Penney Company, Inc. (NYSE:JCP) tapped company veteran Jan Hodges to take on the role of senior vice president, general merchandise manager for the home goods section -- but the market has not reacted kindly today. Specifically, the shares are off nearly 6% to $7.92, and earlier, touched a 31-year low of $7.82. In the options pits, puts are outpacing calls by nearly 33%, or 115,000 contracts to 87,000 contracts. Nevertheless, the most popular strike is the November 9 call, where nearly 16,000 contracts have crossed the tape.
The majority of the action at that strike transpired at the ask price, suggesting the calls were purchased. Meanwhile, implied volatility had jumped 8.5 percentage points at last check, and volume outstrips current open interest levels, implying the creation of new long positions. The volume-weighted average price (VWAP) for the calls is $0.60, so the speculators will profit with each step the underlying takes north of $9.60 (strike price plus VWAP) through the closing bell on Nov. 15. If JCP continues to linger beneath the strike through back-month options expiration, however, the most the traders will lose is the initial premium paid.
Although one could infer that the calls buyers are bullish, that theory is cast into doubt by J.C. Penney Company, Inc.'s extraordinarily high levels of short interest. During the past two reporting periods, short interest spiked 14.7%, and now comprises close to 82% of the equity's total float. Therefore, it's no stretch to think some of today's long call positions were initiated to hedge short stock positions.
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