Options Update: J.C. Penney Co. Draws Heavy Put Volume Post Earnings

Department-store retailer J.C. Penney Co.
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has been targeted by a wealth of analyst ire today. Ahead of the open, Thomas Weisel cut its rating on the company to “underweight” from “market weight,” while Deutsche Bank cut its target on the shares to $18 from $20. Deutsche Bank also reiterated its “buy” rating on the security.

The moves are apparently in reaction to JCP’s reported 51% drop in fourth-quarter earnings. Ahead of the open on Friday, the company said that profit fell to $211 million, or 95 cents per share, from $430 million, or $1.93 per share, last year. Sales dropped 9.8% to $5.76 billion, with same-store sales declining 11%.

On a continuing operations basis, J.C. Penney said it earned 94 cents per share, exceeding its prior guidance of profit of 90 cents to 93 cents per share. Looking ahead, the company said it expects a first-quarter loss of 20 cents to 30 cents per share with sales declining as much as 13%. Analysts were looking for a fourth-quarter profit of 88 cents per share, and a first-quarter loss of 15 cents per share.

While Wall Street analysts debate the merits and pitfalls of JCP’s quarterly report, options traders are piling into puts on the security. In fact, the activity has placed JCP on our Intraday Volume Explosion List. So far today, the stock’s March 12.50 put has seen more than 27,000 contracts change hands, with much of this volume trading at the bid. With open interest at this front-month option numbering a mere 6,129 contracts, it is likely that we are seeing the initiation of sell-to-open put activity on JCP.

Bristol-Myers Squibb put volume details

The Anatomy of a J.C. Penney Put Position

Running with this theme, I noticed that 4 blocks totaling 11,288 contracts changed hands at 10:56 a.m. Eastern time at the bid price of $0.40, suggesting that the options were potentially sold to open. The total credit received for this trade arrives at $451,520 — ($0.40 * 100)*11,288 = $451,520. Remember that a put-sell trader keeps the premium received on the trade as long as the underlying shares remain above the sold strike through expiration, which, in this case, is March 20, 2009.

By entering this trade, the investor is indicating that he expects JCP to hold above the 12.50 level for about the next month. With the stock breaking below key support at the 15 level today, this position has started on the wrong foot. That said, let’s see what JCP’s technical and sentiment backdrops reveal about the equity’s prospects.

Getting Technical

Technically speaking, JCP has underperformed the S&P 500 Index (SPX) by more than 5% during the past 60 trading days. Additionally, the stock has plunged more than 23% since January, bringing the its losses to nearly 70% since February last year. Throughout this decline, the shares have fought a losing battle against their declining 10-week and 20-week moving averages. The former of these intermediate-term trendlines has recently dropped into the 18 region – home to growing short-term resistance for JCP.

On the other hand, there appears to be growing support at the 14 level for the equity. JCP bottomed near $14 per share in late November 2008, and this area could provide a layer of technical support for the shares. Put sellers would want this area to hold firm, as a breach of key support here could have bearish implications for JCP.

Weekly chart of J.C. Penney since April 2007 with 10-week and 20-week moving average

The Sentiment Drivers

There is very little for contrarian investors to take away from JCP’s sentiment backdrop. Normally, I look for sentiment that runs counter to an equity’s price action. Such is not the case with JCP, as the bears appear to be in full control of the shares. Specifically, the stock’s Schaeffer’s put/call open interest ratio (SOIR) of 1.79 ranks above 85% of all those taken in the past year, falling just 15% shy of an annual pessimistic peak.

Elsewhere, short sellers have loaded up on the stock, as the number of JCP shares sold short surged by 12.27% during the most recent reporting period. As a result, a hefty 10.27% of the stock’s float is sold short. What’s more, Wall Street is also betting against the security. Currently, 6 of the 9 analysts following JCP rate the shares a “hold” or worse.

Sentiment indicators for J.C. Penney

The Verdict?

While a put-sell position is far from being an overtly bullish position on the shares, it does bring with it expectations that the underlying shares will not fall much further. There is a case to be made that JCP could be forming a bottom near its November 2008 lows in the 14 area. However, with a weakening global economy as a backdrop, I would be hesitant to bet on such stability in the shares. In fact, if JCP breaks with support at the 14 level, we could quickly see the equity tumble to $10 per share – site of tentative support for the stock from October 2000 through January 2001.

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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.