J C Penney Stock Sees Surge of Pre-Earnings Options Trading

J C Penney stock is tumbling amid a sector-wide sell-off in retail stocks

May 11, 2017 at 2:50 PM
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Retail stocks are front and center today, following a steep post-earnings drop for Macy's Inc (NYSE:M). The bearish bias has spread throughout the sector, with shares of J C Penney Company Inc (NYSE:JCP) trading down 7.7% at $5.27. With JCP earnings due ahead of tomorrow's open, the stock's options are flying off the shelves today -- trading at nine times what's typically seen at this point in the session. Plus, with 187,030 contracts on the tape, JCP options volume is at a new annual high, with both long- and short-term traders targeting the retailer.

Among JCP's longer-term traders, it looks as if one speculator may have rolled his long January 2018 5-strike puts down to the 3 and 4 strikes. Additionally, Trade-Alert points to the possible sale of a split-strike strangle with JCP's January 2019 5-strike put and 10-strike call. 

Meanwhile, among short-term options, the weekly 5/12 5.50- and 6-strike calls were likely used to initiate a long call spread ahead of earnings -- a theory echoed by Trade-Alert. If this is the case, 9,300 6-strike calls were sold to fund the purchase of a symmetrical block of 5.50-strike calls for an initial net debit of $0.17 for the spread, or $158,100 (number of contracts * premium paid * 100 shares per contract).

This is also the most the trader stands to lose, should JCP stock settle at or below $5.50 at this Friday's close, when the weekly options expire. Meanwhile, by lowering the cost of entry with the sold call, the trader has also reduced her breakeven mark to $5.17 (bought strike plus net debit) and capped her maximum reward at $0.33 per spread (difference between the two strikes less the net debit), no matter how high JCP shares rise.

More broadly speaking, JCP options traders have been getting defensive ahead of earnings. Specifically, the weekly 5/12 5-strike put has seen the biggest rise in open interest among near-term options in the last two week, with almost 12,000 contracts added -- the bulk of which appear to have been bought to open. In other words, put buyers expect JCP stock to breach $5 by week's end.

Amid today's decline, JCP stock hit a new three-year low of $5.20, with the shares last seen south of $5 in February 2014. Longer term, J C Penney stock has shed more than 36% year-to-date, and its post-earnings history doesn't give any clues as to which way the security may trade tomorrow. Over the past eight quarters, JCP shares have closed higher in the session subsequent to reporting four times -- averaging a single-day post-earnings swing of 7.8%, regardless of direction. It could be a volatile one, though, with the options market pricing in a much bigger-than-usual 16.8% swing.

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