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Four Ways to Trade JC Penney

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A look at the different ways to profit after the earnings announcement tomorrow morning.

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MINYANVILLE ORIGINAL Following in the footsteps of Macy's (M) strong earnings, JC Penney Company (JCP) is set to announce its earnings before tomorrow's opening bell.

After reporting lower-than-expected first-quarter results, JC Penney announced that it will discontinue its $0.20 per share quarterly dividend, and that it no longer expects to meet the 2012 yearly projected GAAP EPS of $1.59. With this quarter's earnings, analysts expect EPS to go negative and come in at - $0.25 on revenue of $3.2 billion. Overall, the consensus range for EPS was between $-0.49 and $0.09 and revenue between $2.98 and $3.44 billion.

While JC Penney is expected to report a loss this quarter, CEO Ron Johnson has major plans for the future as the company dramatically changes its selection of brands and the overall store experience.

Eventually, the company plans to install shops for Levi's and its Arizona brand as well as add a user-friendly advice and service section, similar to Apple's (AAPL) Genius Bars, known as Town Squares. Additionally, there are plans to rework the entire kids department into a more family-friendly shopping environment.

During the quarter, JC Penney also fired 350 employees at its headquarters and hopes that the shift brings a refreshing change to corporate culture. Finally, the Wall Street Journal expects JC Penney to slash prices universally across its products in order to entice customers to its stores and compete with other retail companies.

Historical Movement Over the Last Four Quarters:
  • Historical Movement: -19.7%, -0.5%, -2.8%, -1%
  • Average Magnitude of Post Earnings Return 6%
  • Implied Movement: 14.4%
  • Measured Move Targets: $2.80
  • Upside Measured Move Target: $22 plus $2.80= $24.80
  • Downside Measured Move Target: $22 minus $2.80= $19.20
Four Ways to Trade It:

Buying the Movement:
  • Trade: Buy August 22 Straddle for $2.80
  • Risk: $280 per 1 lot
  • Reward: unlimited
  • Breakeven: $19.20 and $24.80
Selling the Movement (My trade):
  • Trade: Sell the August 19 – 18 Put Spread and 25 -26 Call Spread Condor for $0.35
  • Risk: $65 per 1 lot
  • Reward: $35 per 1 lot
  • Breakeven: $18.65 and $25.35
Bearish
  • Trade: Buy the August 22 - 19 Put Spread for $1
  • Risk: $100 per 1 lot
  • Reward: $200 per 1 lot
  • Breakeven: $21
Bullish:
  • Trade: Buy the August 23 – 25 – 27 Call fly for $0.26
  • Risk: $26 per 1 lot
  • Reward: $174 per 1 lot
  • Breakeven: $23.26 or $26.74
No positions in stocks mentioned.
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