With the market being predominately bullish for several months, it has been hard to come across many bearish trade ideas. And on the rare occasion we have come across a bearish setup, the market’s bullishness has been lingering there, making us think twice about the trade.
However, we have come across one bearish trade idea that has more than enough reason behind it to make it worth pulling the trigger.
JCPenney (NYSE:JCP — $17.61): Long Puts
The trade: Buy the June 18 puts for $1.70 or less.
The strategy: The long put is an option strategy generally used for a bearish outlook. The trade can profit when the stock falls and the put premium increases to an amount more than was paid as the JCP put option moves further and further in-the-money. Maximum profit is almost unlimited because JCP can only fall to $0 (though that is highly unlikely), and the maximum loss is $1.70 or whatever was paid if JCP finishes at or above $18 at June expiration. Breakeven is $16.30 based on a cost of $1.70 at expiration.
The rationale: There has been an awful lot of news about JCPenney for months now. The company has been reporting declining sales for a long time, and a new marketing strategy pretty much failed, which led to the dismissal of CEO Ron Johnson. JCPenney has been the subject of some good news lately; it was revealed that the company used less of a loan from Goldman Sachs than had been thought, and an analyst upgraded the stock to a “hold.” However, it also revealed that sales are still declining.
Following Wednesday’s spurt higher, how can a trader capture a possible return lower with limited risk? The answer is to buy a put option.
Click to Enlarge JCP has essentially been trading in a range between $14 and $18 since the beginning of March. A move back down to $14 or lower would not be out of the question since the stock is trading at the high end of the channel. A close over $18 would be a bullish sign for the stock, and it would show that maybe investors are willing to give the company another chance.
JCPenney is expected to announce earnings on May 16.
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.