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Last-Minute Traders Gamble On J.C. Penney


J.C. Penney's at-the-money options are popular ahead of expiration.

Eleventh-hour option bettors have jumped on J.C. Penney Company, Inc. (JCP) today, gambling on the retailer's end-of-week trajectory ahead of July options expiration tomorrow. In afternoon trading, J.C. Penney has seen about 15,000 calls and 19,000 puts change hands, compared to its average intraday volume of around 9,600 calls and 16,000 puts.

Attracting the most attention on both sides of the tape is the near-the-money July 21 strike, which has seen roughly 3,100 calls and 5,600 puts traded. Considering volume has exceeded both call and put open interest at the strike, we can assume that speculators are establishing new, very short-term positions. Plus, the majority of the contracts have crossed at the ask price, suggesting they were bought. Specifically, the volume-weighted average price (VWAP) for the calls is $0.30, while the VWAP for the puts is $0.33.

By buying the calls, the traders are hoping J.C. Penney muscles atop the $21.30 level (strike plus premium paid) by the end of the day tomorrow. On the flip side, the put buyers need J.C. Penney to remain south of the $20.77 level in order to profit on the play. In either case, the maximum risk is limited to the initial cost of the option. However, the premiums paid are relatively steep at the moment. The stock's Schaeffer's Volatility Index (SVI) of 65% stands higher than 61% of all others of the past year, suggesting J.C. Penney's short-term options are relatively pricey right now.

Widening our sentiment scope, we find that puts have been the options of choice of late. During the past two weeks on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), investors have bought to open nearly twice as many J.C. Penney puts as calls. In fact, the stock's 10-day put/call volume ratio of 1.72 registers in the 79th annual percentile, suggesting speculators have initiated bearish bets over bullish at a faster-than-usual clip.

Echoing that skepticism, short interest swelled by 16.7% during the past month, and now accounts for almost 30% of J.C. Penney's total available float. At the stock's average daily trading volume, it would take about a week to repurchase all of these pessimistic positions.

On the charts, it's no wonder Wall Street is leery of J.C. Penney. The stock has more than halved itself since skimming the $43 level in mid-February, pressured lower beneath its 10-day and 20-day moving averages. At last check, the equity has added 3.1%, after activist investor Bill Ackman of Pershing Square Capital Management waxed optimistic on the stock's long-term growth prospects, and after a National Retail Federation survey said U.S. shoppers plan to spend more on back-to-school items this year compared to last.

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

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