2nd Trade Update $JCP: Closed Dec Call Spread for a Small Gain

by Dan December 3, 2012 10:05 am • Commentary

2nd Trade Update Dec 3rd, 2012:  I am going to close this defined risk bullish bet for a small profit, I got a little bit of the rally that I was looking for, but at this point with the stock below my long strike it will take another burst for this position to make a multiple of my premium outlay.  Jan/Feb maybe make or break for this company and their new CEO as investors get a sense for any traction on their new store format.

Action: Sold to Close JCP ($17.40) Dec 18 /19 Call Spread at .27 for a .10 gain on the position.


Trade Update Nov 23rd, 2012: With just a few minutes left till the Nov weekly portion of my Nov/Dec Call Calendar expiring, I want to take the opportunity to Spread the Dec calls that I own and further reduce the cost of the ones that I own.   To recap, on Tuesday, I bought the Dec 18 calls for .91 and to finance I sold the Nov23rd weekly 18 calls at .26 when the stock was $17.27.  Now just a few days later and the stock at basically in the same spot, the Nov 18 calls are offered at .01 and will expire worthless and the Dec 18 calls are .80 bid.   So i made the .26 on the Nov leg and I have lost .11 on the Dec leg.  Now I am going to further reduce my cost of the Dec 18 calls.

Action Sold to Open JCP ($17.28) Dec 19 Call at .48
New Position:  Long JCP Dec 18/19 Call Spread for .17


Break-Even on Dec Expiration:

-Profits of up to .83 btwn 18.17 and 19, max gain of .83 at 19 or higher.

-Losses of up to .17 btwn 18 and 18.17, max loss of .17 below 18



Original Post November 20th, 2012: New Trade $JCP: Threading the Needle, Playing For A December Bounce

JCP is one of those story stocks that has a little something for every trader.  The stock has been amazingly volatile since AAPL’s former retail head took over as CEO of the beleaguered retailer.  The stock is down 50% ytd and down 73% from the 52 week highs made in January after the stock was still full of hopeful investors for a sustained and dramatic turnaround after CEO Ron Johnson’s initial restructuring assessment.

The stocks performance is suggesting that Johnson has failed before he has really even gotten underway.  In  late September management hosted an analyst meeting at their Texas headquarters walking analysts through a model of their new store format, that for the most part was very widely regarded as trans-formative.   The meeting was going very well, with the stock up almost 10% at one point as Johnson detailed the very recent success of the branded store within a store strategy, but then the whole story fell apart as it became apparent that their legacy format was quickly losing market-share for a whole host of reasons.  The stock is now down about 45% from the late Sept intra-day highs.

On a very near-term basis I think there is way too much negative sentiment built into the stock has commentary has gone from Resurrection to Burial as analysts are now calculating cash burn scenarios.  Short Interest sits at 40% of the float.  

My View Right Here: Johnson has proven to be promotional of his plan, if nothing else……if traffic picks up in this all important Holiday selling week, I would be surprised if investors don’t hear about.  Earlier this morning the stock shot up about 5% on rumors that the company is being considered as an LBO candidate and as expected, short dated vols spiked a bit as result of some furious options buying.  Out right long premium plays will be tough to make money on.  Interestingly the largest trade on the day, and after the bullish rumors was the purchase of 10k of the Jan 2014 10 Puts for 1.39, at least one trader was looking down when most were looking up.

My Trade: I want to take advantage of the elevated vol levels today (chart below shows 30 day vol up nearly 5 points):

[caption id="attachment_19680" align="aligncenter" width="490" caption="JCP 30 day IV from Bloomberg"][/caption]


This may sound counter-intuitive because I am going to be buying Dec options, but I am going to be financing them with the sale of the Nov Weeklies.

TRADE: JCP ($17.27) Bought the Nov 23rd/ Dec 18 Call Calendar for .65

-Sold 1 Nov 23rd 18 Call at .26

-Bought 1 Dec 18 Call for .91

Break-Even on Nov 23rd Expiration (Friday):

-If the stock is below $18 on Friday’s close I will own the Dec 18 calls for .65, and then look to spread them by selling a higher strike call and thus further reducing my cost basis.

-If the stock is higher than $18 on Fridays close I will make the small difference btwn the call that I am short and the call that I am long in Dec, but I will need to close the spread to capture the difference or I will be assigned on the short calls and long Dec calls.

-If the stock is well below $18 the stock calls that I am short will expire worthless and I will suffer losses of the Dec calls that I am long.  My Max Risk is the .65 premium that I paid for the spread.

TRADE RATIONALE: JCP is obviously a whippy stock, and this is a bit of a contrarian play, but markets could calm down as we get into pre-Thanksgiving trading that should be quiet tomo afternoon, markets closed on Thursday and open till 1pm Friday. I like the idea of selling Nov calls and watch them decay quickly as I eat Turkey.