Pre-Earnings Bulls, Bears Circle J C Penney Company Inc (JCP) Option Pits

Option traders are taking side ahead of J C Penney Company Inc (NYSE:JCP) earnings

by Josh Selway

Published on Feb 25, 2016 at 2:00 PM

Retailer J C Penney Company Inc (NYSE:JCP) will report fourth-quarter earnings Friday morning, and the company hopes it can duplicate the post-earnings success of one sector peer. Unfortunately, history isn't on JCP's side, as the stock has only posted one positive session after earnings during the past six quarters. Moreover, the shares fell 15.4% after JCP reported earnings in November. Ahead of the event, both bulls and bears have been targeting JCP -- which is extending its recent success on the charts this afternoon.

Specifically, the retail stock is up 7.5% at $8.28. Since it fell to an annual low of $6.00 on Jan. 20, JCP has bounced back to add 38%, beating out the S&P 500 Index (SPX) by almost 19 percentage points over the past 40 sessions. Today's gains put the shares on pace to close above their 100-day moving average for the first time since early November. 

Meanwhile, call volume is running at six times the average intraday pace today, with heavy attention being paid to the weekly 3/4 8.50-strike calls. In fact, volume here nearly doubles the next most-active strike. Data confirms traders are buying to open the weekly calls, meaning they expect JCP to top $8.50 by next Friday's close, when the contracts expire. 

However, outside of today, option activity on JCP has taken a decidedly bearish turn. The stock's 10-day put/call volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) has more than doubled over the past two weeks, and now stands at 2.95 -- which, aside from revealing almost three puts have been purchased for every call, marks an annual high.

During this two-week time frame, three of the most popular options have been the weekly 2/26, 3/4, and March 7 puts, and data from the major exchanges confirms buy-to-open activity in each series. To put it simply, it seems traders are either betting on JCP plummeting below $7, or, given JCP's recent technical tenacity, it's shareholders using these options as a hedging mechanism to lock in their paper profits ahead of earnings. 

Taking a look outside the options pits, short interest remains extremely elevated on J C Penney Company Inc (NYSE:JCP). Specifically, roughly one-third of the stock's float is sold short, and it'd take these bears well over a week to buy back their bets, at average daily volumes. However, it should be noted that short interest fell by almost 8% during the last two reporting periods. 

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