J C Penney Short Sellers Hedge Bets Ahead of Earnings

There's been unusual call buying on JCP

Managing Editor
Aug 15, 2018 at 2:33 PM
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Retail giant J C Penney Company Inc (NYSE:JCP) is lining up to the earnings confessional this week, set to report its second-quarter results before the market opens, tomorrow, Aug. 16. Below, we will take a look into J C Penney's long-term performance on the charts, as well as to what the options market is pricing in for the stock's post-earnings moves.

Last seen down 8%, at $2.43, JCP is significantly lower alongside other big name retailers, after sector peer Macy's (M) reported a disappointing gross margin outlook. Longer term J C Penney stock has not fared much better, with the shares stuck in a series of lower highs since late February. Any breakout attempts have been quickly capped by the 80-day moving average, pushing JCP to its 23% year-to-date deficit.  

Daily Chart of JCP with 80MA

Looking at its earnings history, JCP has closed lower the day after the company reported in five of the last eight quarters, including the two most recent, and a 16.6% drop this time last year. Looking back eight quarters, the shares have moved 9.9% the day after earnings, on average, regardless of direction. This time around, however, the options market is pricing in an enormous 25% move for Thursday's trading.

In the options pits, traders have been leaning bullish during the past two weeks. This is per the stock's 10-day call/put volume ratio of 2.74 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Plus, this ratio ranks in the 80th percentile of its annual range, suggesting calls have been purchased over puts at a faster-than-usual clip.

That could be due to the stock's high short interest levels. Specifically, almost half of JCP's float is sold short, so it's likely some short sellers have bought calls as a hedge against a sharp upside move in the shares.

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