Option Bears Predict Record Lows for JC Penney Company, Inc.

Schaeffer's Investment Research
  JUL 29, 2013 3:10 PM

JCP speculators scooped up long-term put options.

 


JC Penney Company, Inc. (NYSE:JCP) muscled higher on Friday, toppling its 10-day moving average for the first time since July 16. From a longer-term perspective, the shares -- last seen at $16.59 -- have given up roughly 28% over the past year, and option traders are bracing for more downside.

During the course of Friday's session, JCP saw about 22,000 puts change hands -- a 76% mark-up to its average daily put volume. Traders established new positions at the out-of-the-money January 2015 10-strike put, which saw open interest increase by more than 3,500 contracts over the weekend. Plus, 70% of the LEAPS crossed on the ask side, suggesting they were bought.

By purchasing the puts at a volume-weighted average price (VWAP) of $1.36, the buyers expect JCP to breach $8.64 (strike price minus VWAP) by early 2015. In other words, the traders are betting on JCP to lose nearly half its value over the next year-plus, and sink to record lows. Risk, meanwhile, is capped at the initial premium paid for the puts, should JCP remain in double-digit territory.

Since the puts are so far out of the money, it's possible that JCP shareholders purchased the contracts to hedge their bullish bets. By buying options insurance, the traders lock in an acceptable price at which to sell their JCP shares ($10 apiece), should the stock take a turn for the worse.

Friday's appetite for puts is just more of the same for JCP. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculators have bought to open almost three JCP puts for every call during the past two weeks. What's more, the resulting 10-day put/call volume ratio of 2.71 sits just 2 percentage points from a 12-month high, suggesting option buyers are picking up bearish bets over bullish at a near annual-high clip.

Still, the security's Schaeffer's put/call open interest ratio (SOIR) of 0.78 indicates that calls outnumber puts among options with a shelf-life of three months or less. This ratio stands higher than just 15% of all other readings of the past year, implying that JC Penney Company, Inc. near-term traders remain more call-biased than usual.

This article by Andrea Kramer was originally published on Schaeffer's Investment Research.

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