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J.C. Penney Option Players Predict Short-Term Volatility

Breaking down a long straddle on JCP

by 2/5/2013 12:32 PM
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Department store retailer J.C. Penney Company, Inc. (NYSE:JCP - 20.12) has reversed early losses to trade back atop the $20 marker, as investors react to legal drama between the company and its bondholders. Against this backdrop, one options speculator is gambling on a significant short-term move for the stock, employing both weekly puts and calls.

Around midday, JCP has seen about 24,000 puts and 23,000 calls cross the tape, more than doubling its average intraday volume. Most popular has been the weekly 2/8 19 strike, which has seen around 9,350 puts and 7,900 calls change hands. Volume has exceeded open interest on both sides of the aisle, hinting at new initiations.

Digging deeper, much of that volume transpired in symmetrical blocks of 2,510 contracts. The puts and calls crossed at the ask prices of $0.56 and $0.68, respectively, suggesting they were bought. In other words, the investor constructed a long straddle for a net debit of $1.24 per pair of options.

By purchasing puts and calls at the same strike, the trader is expecting JCP to make a major move by the end of the week -- direction doesn't matter. More specifically, the strategist will profit if JCP perforates one of two breakeven rails: the $17.76 level (strike minus net debit) or the $20.24 level (strike plus net debit) by Friday's closing bell, when the weekly options expire. However, even if JCP settles right at $19, the most the trader can lose is the initial net debit paid.

At last check, JCP is trading near the upper breakeven rail, up more than 3%. The company last night filed a lawsuit to block bondholders from declaring default. The suit pertains to almost $3 billion of bond debt, and was filed in response to a letter from hedge-fund creditors claiming JCP violated bond terms by pledging inventory as collateral. "We believe this notice of default is invalid, completely without merit and is intended to create self-interested trading opportunities in the market," CFO Ken Hannah said in a statement.


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