It has been a long time since J C Penney Company Inc (NYSE:JCP) investors had anything to cheer about. JCP stock is down roughly 58% so far this year, sales continue to founder, operating margins remain weak and the company appears to have no clear path to recovery. For JCPenney stock investors, there are few positive options.
JCP stock bulls might point to next month’s quarterly earnings report as a sign of potential hope. But, even when earnings have been better than expected this year, JCPenney stock has fallen — a bearish signal, indeed.
For the record, JCPenney is slated to release its third-quarter earnings report in the second week of November — the company has yet to officially announce a date. Wall Street is expecting a loss of 17 cents per share, on average, with revenue down 3.9% at $2.74 billion.
Sentiment is pretty much what you would expect for a stock that has plunged 58% amid this year’s bull market rally. Thomson/First Call reports that 17 of the 22 analysts following JCP stock rate it a “hold” or worse.
And, while the 12-month consensus price target of $5.71 represents a 66% premium to yesterday’s close, analysts are sure to revise those targets lower if JCPenney doesn’t offer up some kind of path forward soon.
Meanwhile, short sellers are having a field day with JCPenney’s stock price. As of the most recent reporting period, some 137.9 million shares of JCP stock were sold short, representing more than 47% of the stock’s total float.
Typically, a sizable short position like this would lend itself toward a potential short-squeeze situation, but, with JCP stock price in freefall, it would take a significant rally to make these shorts nervous. Still, a bit of profit taking from short-sellers could provide a bit of support post earnings.
Click to Enlarge Options traders have also piled on to the bearish bandwagon. Currently, the November put/call open interest ratio comes in at heavily skewed reading of 2.72, with puts nearly tripling calls among back-month options. This is even more disconcerting given that: one, short sellers typically buy calls to hedge their short positions; two, stocks typically see a rise in call volume ahead of an event like earnings; and, three, stocks trading in dollar territory typically seen more calls than puts given that there is more upside potential to be had than down — you can’t fall below zero, after all.
In short, JCP stock options traders are signalling a vote of absolutely no confidence in the company.
Implieds, meanwhile, are pricing in a rather large move for JCPenney stock. Currently, the November options are anticipating a post-earnings move of nearly 11%. This places the upper bound at $3.77, while the lower bound lies at $3.03. A rally still leaves JCP well short of resistance at $4, while a sell off would threaten to send the stock below $3 to another all-time low.
2 Trades for JCP Stock
Long Put: In all likelihood, JCP is in for more pain following its quarterly earnings report. Those traders looking to side with the bears might consider a buying a Nov $3.50 put. This in-the-money put was last asked at 37 cents, or $37 per contract. Breakeven lies at $3.13, while a double on the trade can be had if JCP trades below $2.76 ahead of expiration.
Call Spread: On the other hand, with expectations so low, JCP stock has a chance — albeit a slim one — of providing some positive data with next month’s quarterly report. Pretty much any positive news at this point could spark a short-term rally for JCPenney stock, creating a high-risk, high-reward situation for options traders.
Those willing to take such a risk might want to consider a Nov $3.50/$4 bull call spread. At last check, this spread was offered at 12 cents, or $12 per pair of contracts. Breakeven lies at $3.62, while a maximum profit of 38 cents, or $38 per pair of contracts — a potential return of 216% — is possible if JCP stock closes at or above $4 when November options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
