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Option Brief: J.C. Penney Company, Inc.'s (NYSE:JCP) option activity is running below normal levels today, but the struggling retailer did manage to capture the attention of one longer-term spread strategist. In fact, matching blocks of 5,000 contracts crossed simultaneously at the February 2014 7-strike put and February 2014 9-strike call shortly before 11:00 a.m. EST.
Digging deeper into the data, the puts were exchanged at the bid price of $1.46, while the calls traded at the bid price of $1.12 -- suggesting both blocks were sold. Meanwhile, information from the International Securities Exchange (ISE) confirms that these transactions were of the sell-to-open variety. In other words, the speculator appears to have initiated a short strangle for a net credit of $2.58 per pair of contracts.
In the scenario, the strategist is betting that JCP will remain between $7 and $9 -- the stock is currently docked at $7.42 -- between now and February options expiration. This would render both contracts worthless, allowing him to pocket the net credit collected, which also represents the maximum profit on the play. Meanwhile, the lower breakeven rail is $4.42 (put strike minus the net credit), and the upper breakeven mark sits at $11.58 (call strike plus the net credit). If the stock is trading below the former at expiration, losses will accumulate with each step the shares take toward $0. However, if the equity ascends past the latter, the trader's risk is theoretically unlimited.
J.C. Penney Company, Inc. (NYSE:JCP) has taken a beating on the charts in 2013, surrendering more than 62% year-to-date, and trailing the broader S&P 500 Index (SPX) by almost 50 percentage points during the past two months. Adding insult to injury, the shares just touched a 32-year low of $6.24 on Oct. 22.