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Option Brief: Before the market opened yesterday, an analyst with Imperial Capital slashed her price target on J.C. Penney Company, Inc. (NYSE:JCP) to $1, causing the shares to plunge more than 8% through the course of the session. Meanwhile, in options land, traders were busier than usual, with volume running at nearly a 60% mark-up to its typical intraday pace. Most interesting was a two-legged transaction that took place around noon, involving JCP's January 2015 and 2016 5-strike puts.
Specifically, twin 10,000-contract blocks traded at the strikes. The earlier-dated LEAPS changed hands below the bid price, at $1.60 each, suggesting they were sold. Meanwhile, the later-dated lot crossed near the ask price, for $2.21 per contract -- and open interest spiked at the strike overnight -- indicating the block was purchased to open. In other words, this individual was apparently rolling out his long put position in the expectation that JCP shares will breach the $5 level by January 2016 -- a theory that Trade-Alert affirms. Plus, by selling the January 2015 LEAPS to close, the speculator partially offset the cost of buying the January 2016 LEAPS to open.
At last check, delta on the latter stood at negative 0.21, or 21%, representing a roughly 1-in-5 chance the option moves into the money ahead of expiration. Even if JCP remains above the strike through January 2016, the most Monday's big trader will lose is the net debit paid.
Taking a step back ... yesterday was full of interesting developments for J.C. Penney Company, Inc. (NYSE:JCP). During the course of the session, the stock landed on the short-sale restricted list (helping account for the surge in put trading), and its at-the-money implied volatility hit a 52-week high. What's more, late in the afternoon, news broke that the retailer had reached a revised (and reduced) partnership agreement with Martha Stewart Living Omnimedia, Inc. (NYSE:MSO).
At last check, JCP shares were up 4.7% at $6.72. However, earlier, the stock notched a 30-plus-year low of $6.24, after Deutsche Bank halved its price target to $6 from $12.