Trade Update May 16th, 2012 at 9:33am: Well we had a couple things right on our analysis heading into this trade last night, we thought that the options market was right on this one and that a larger than normal move was in store for JCP following last nights Q1 report. But here is the thing, as we said below, we had really no clue on what the company was going to report and guide too, and given a couple technical factors we made a vol bet with a directional bias. The big thing that we got wrong was obviously direction, and that happens, for most about 50% of the time, and the truth is we look for trade structures that put the odds in our favor.
At this point with JCP down about 15% following disappointing results and guidance, the likelihood that the Jun 37 Calls that we are long (against the short May 37 calls) will be in the money in 5 weeks is probably pretty slim. But we don’t sell tiny options, and we will stay long the June and let the May’s expire worthless on Friday. For Reference, with the stock at 28.35 the June 37 calls are .06 bid, paid .45 for the spread, so this is a bad loser, but with short interest high who knows what could happen btwn now and expiration in June……..One thing that could get the stock back above $30 would be a new large investor, someone like Ackman of Pershing Square (largest holder at almost 18%).
This is probably a good as time as any to get on the Ron Johnson train as the stock is below the level where he was appointed and took over. Investors who believe in his transformation should be giving him qtrs or maybe even years to turn this ship around. With Last night’s re-set, some may see opportunity.
Original Post May 15th, 2012: JCP: Q1 After the Bell, Options Market Suggesting the Honeymoon is Over For Mr. Johnson
JCP reports Q1 earnings tonight after the close.
-The options market is currently implying a ~10.5% move up or down following the report, which is massive compared to the last 4 qtrs avg move of only about 1.87% and the 8 qtr avg of about 3%.
*with the stock about $33, the May 33 straddle is offered at 3.45, or about 10.5% of the stock price, that is the move you would need to break-even if you bought the straddle by Friday’s close.
-It’s been about 11 months since CEO Ron Johnson announced his departure from AAPL to take the top spot at JCP, and about 6 months since actually taking the helm. I think it is safe to say that the muted moves over the last 4 qtrs suggest that investors were either waiting for Johnson to come in and implement change or giving him a “Pass” for the first couple quarters.
-The Honeymoon period is over in options traders’ minds, and the size of the implied move suggests that this is a “Put up, or Shut up” quarter for the new CEO. Digging deeper into May options in front of next week’s earnings, open interest in JCP is almost evenly distributed between puts and calls in May. So even with such a big move expected, options traders are generally agnostic as far as direction.
-Today a trader bought a June 32/29 1×2 Put Spread 5k by 10k for .29, the break-even on this trade is 31.71, and the max gain is 2.71 at 29.00, down 12%. The Pay-Out trails off btwn 29 and 26.29. This is not a bad trade at all if you are not expecting a move greater than the implied move….but I guess I would add that with the stock already down 24.5% from the 52 week highs made in February, news bad enough to take the stock down 11% could quite possibly take it down 20% in a market that does not seem to be that patient with disappointing news (see CSCO, GMCR, HLF and JPM)
OUR VIEW ON THE EVENT: I guess we have to start by saying that we have no clue how good or bad the quarter and/or the guidance will be, but with the implied move where it is, and the stock’s reaction in January to better than expected guidance, I would be fairly surprised to see a small move. I guess the other fairly important point to mention is that sentiment couldn’t be more mixed in the name with Wall Street analysts having only 5 Buys, 11 Holds and 3 Sells, while even more importantly, Bloomberg’s latest data suggests that 24% of the float is SHORT.
Technically the stock is sitting at an interesting support level, almost equal to the level in which the stock traded in up to last June when CEO Johnson’s appointment was made.
TRADE: JCP ($33.20) Bought the May / June 37 Call Calendar for .45
-Sold 1 May 37 Call at .44
-Bought 1 June 37 Call for .89
Break-Even On May Expiration:
If the stock is 37 or below I effectively own the June 37 Call for .45 as the May 37 Call will expire worthless.
If the stock is above 37 I make or lose the difference btwn the May that I am short and the June that I am long, My Max Risk is .45
Trade Rationale: May open interest in JCP is more than 5x that of any other expiry. It’s obvious that some large institutions have been buying premium in May, which has distorted May options versus other expiries.
-As a result, we want to sell May and buy June to take advantage of that. Given heavy short interest and recent weakness, we are going to play for a bounce.
-37 is around the recent high in late April, which is why we chose the 37 strike, as we don’t want our short May call to end up in the money by Friday