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Optimism Continues to Run Hot on J.C. Penney Company, Inc. (JCP)

One strategist employed a bull call spread on JCP

by 4/29/2013 10:49 AM
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J.C. Penney Company, Inc. (NYSE:JCP) saw an influx of bullish options activity on Friday, amid some upbeat investment news. As a result, roughly 242,000 calls crossed the tape during the course of the session -- almost six times the norm, and about double the number of puts exchanged. It looks as though one speculator utilized August-dated calls to construct a bull call spread on the struggling retailer, with the hopes that it will trek significantly higher over the course of the next several months.

More specifically, a block of 11,000 calls was bought at the August 19 strike for $1.69 apiece, while a matching number of calls was sold at the August 26 strike for $0.29 each -- yielding a net debit of $1.40 per pair of contracts. Meanwhile, open interest rose at both strikes over the weekend, signaling the initiation of new positions. Essentially, the trader is expecting JCP to finish at or above $20.40 (bought strike plus net debit) by August expiration, but not so far above $26 -- a level last explored in mid-October -- that he would have been better off with a simple "vanilla" call purchase on the stock. At the very least, this breakeven reflects an 18% increase over the stock's current price of $17.28. His maximum profit is limited to $5.60 (difference between the strike prices, minus the net debit), no matter how far the shares should climb between now and Aug. 16th's closing bell. Conversely, his potential risk is capped at the net debit paid to establish the spread.

This uptick in call volume mirrors the overall upbeat attitude toward J.C. Penney Company, Inc. lately. In fact, the security's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio checks in at 2.16, indicating calls bought to open have more than doubled puts during the past two weeks. This ratio is just 1 percentage point shy of a yearly acme, conveying traders have been snapping up calls over their bearish counterparts at a near annual-high pace.

This optimism toward JCP is rather puzzling, given the stock's year-to-date loss of about 12%, as well as its year-over-year decline of nearly 53%. The shares have also trailed the broader S&P 500 Index (SPX) by almost 21 percentage points during the past three months. However, the equity gained enough momentum last week to finish above its 10-week moving average for the first time since late February.

At last check, the stock is up about 1.6%, after the company said Goldman Sachs Group, Inc. (NYSE:GS) has agreed to a five-year $1.75-billion loan for JCP.


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