Options Traders Circle J C Penney, Kate Spade

J C Penney Company Inc (JCP) and Kate Spade & Co (KATE) are among the 20 stocks with the most active options

Feb 21, 2017 at 1:21 PM
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The 20 stocks listed in the table below are the S&P 400 MidCap Index (MID) components that have attracted the highest total options volume during the past 10 trading days. Names highlighted are new to the list since the last time the study was run, and data is courtesy of Schaeffer's Senior Quantitative Analyst Rocky White. Two names of notable interest are retail stocks J C Penney Company Inc (NYSE:JCP) -- which reports earnings this week -- and Kate Spade & Co (NYSE:KATE). Here's a quick look at how traders have been approaching JCP and KATE shares.

Most Active MidCap Options Feb 21

J C Penney Options Traders Target Calls Ahead of Earnings

Since touching an annual low of $6.35 on Jan. 30, JCP shares have encountered resistance at their 40-day moving average, which also happens to sit near JCP's lows from mid-2016. However, it looks as though options traders are betting on some upside, with JCP due to report earnings this Friday. Recent history is on the bulls' side, too, as the stock moved higher the session after its last two earnings reports.

So far today, JCP is up 0.9% at $7.10, as traders cheer encouraging earnings from one blue-chip mega-retailer. In the options pits, calls are outpacing puts -- 11,000 to 4,500 -- with calls trading at 1.2 times their average intraday rate. Today's most active option is the March 7 call, which has seen apparent buy-to-open action, indicating speculators are betting JCP extends today's gains in the short term.

Today's appetite for calls isn't unusual in JCP's options pits, with JCP's 10-day call/put volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) of 2.84 sitting higher than 78% of all other readings from the last year. However, JCP's overall open interest is just 1 percentage point from an annual bottom, with just 564,240 contracts on the books in the wake of February options expiration on Friday. 

Ahead of earnings, options players are pricing in a post-earnings, single-day swing of 12.6% -- much bigger than the average post-earnings move of 7.9% after its last eight earnings reports. Echoing that, J C Penney Company Inc's (NYSE:JCP) 30-day at-the-money (ATM) implied volatility (IV) of 59.2% sits higher than 79% of all other readings from the last 12 months, reflecting elevated volatility expectations ahead of earnings.

Kate Spade Calls Heat Up Amid Buyout Buzz

Meanwhile, fellow retailer KATE has been the target of recent buyout buzz, with the company confirming after earnings last week that it is exploring "strategic alternatives," which could include a potential sale. KATE is up 2.8% at $23.84 so far today, looking to extend its post-earnings lead that saw the shares jump 14.7% in a single-session. This bull gap helped the shares finally break north of the $18.50-$20.50 area, which encompasses both a 38.2% and 50% Fibonacci retracement of KATE's 2016 high and low.

While JCP open interest isn't much to write home about, it's quite the opposite for KATE; open interest sits in the top 15% of its annual range. However, as with JCP, options buyers are bullishly biased, with KATE's 10-day call/put volume ratio at the ISE, CBOE, and PHLX showing 6.52 calls bought to open for every put over the last two weeks. However, this ratio is based on light overall volume, with just 7,601 calls and 1,165 puts bought to open over the last 10 days.

It's also worth noting that KATE's 30-day IV skew of 16.2% sits just 2 percentage points from an annual peak, indicating puts have rarely priced in higher volatility expectations over the last year, relative to calls. What's more, KATE's short interest is up more than 130% over the last two reporting periods, so some of the recent call buying -- particularly at out-of-the-money strikes -- could be attributable to shorts seeking an M&A hedge.

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