New Trade $JCP – So Long Johnson

by Enis May 1, 2013 3:41 pm • Commentary

JCP is down about 10% from its Monday morning high, though it’s still more than a dollar higher than its Thursday close, prior to the Soros news.

We liked the idea of getting into a long position when the stock was around 15.25, and were foiled by the Soros announcement (read below).  We don’t think we’ll get a retracement back down to that area, so today’s pullback is a decent entry to put on a long delta position.  Our original thoughts are now buffeted by the new financing and another savvy investor rooting for the shares to go higher as well.

Most importantly for this short-term trade, the technical picture looks appealing for a bounce here for a couple reasons.  Here is the 10 day chart, with volume on the lower panel:

[caption id="attachment_25405" align="alignnone" width="645"]JCP 10 day intraday chart with volume, Courtesy of Bloomberg JCP 10 day intraday chart with volume, Courtesy of Bloomberg[/caption]

I’ve circled with a red oval the “kick-off” volume day on Apr 26th, after the Soros stake announcement.  Since that buying frenzy, the stock has retraced the past 2 days on much lower volume, and actually reached back down to the prior breakout area this afternoon.  The entry is not perfect now, but it’s pretty darn close.

TRADE:  JCP ($16.20) Bought the May (regular expiry) 16 Call for $0.92
  • Bought the May 16 Call for 0.92

Break-Even on May Expiration:

  • Profits above 16.92, no max profit
  • Losses of up to 0.92 between 16 and 16.92, with max loss of 0.92 at or below 16

Trade Rationale:  This trade is a speculative short-term trade, so it’s smaller size than my longer-term trade structures.  I’m looking for a quick move back up to the 18 level, where I’ll look to take this trade off.  In the meantime, I wanted to buy a pure call because I think the next move higher, if there is one, could be explosive.  But again, this is a more speculative trade, so smaller size.


Original Post April 25th, 2013:  $JCP Thoughts – Soros Announces 8% Passive Stake

George Soros just announced a 8% passive stake in JCP, and the stock is trading up about 7%.  We discussed a potential long position in JCP today, and here were the thoughts we wrote up below, with plans to post tomorrow.

Wish Our Timing Was Better.  Shucks.

When was the last time you heard something positive about JCP?  We can’t remember either.  Even Ron Johnson was not enough to get the stock to rally, as traders were initially excited on hearing the news, but then supremely disappointed when Mike Ullman was announced as the replacement.

However, the price action on the day following that announcement was notable.  It was the largest volume day in JCP history, and JCP stock briefly breached its 2009 low of 13.71 before bouncing back since then:

5 year daily of chart, Courtesy of Bloomberg
5 year daily of chart, Courtesy of Bloomberg

In hindsight, the large volume day is starting to look like potential capitulation.  Perhaps more interesting is that short interest in JCP has not come down much in the past 6 months, despite the stock’s almost 50% fall:

Short Interest in JCP, Courtesy of Bloomberg
Short Interest in JCP, Courtesy of Bloomberg

Short interest today still stands at almost 40% of float, which is very high, but especially for a stock that has declined so much.  That means that much of the buying has come from new buyers who are interested in the name for some reason, no matter all the bad news.

Cash flow concerns are frequently cited at the top of the list of problems for the retailer.  But I was surprised when I looked at the 5 year CDS price, which measures how nervous credit traders are about the potential for default on the company’s bonds.  Despite the stock’s weakness, the CDS price has hardly since July:

5 year CDS of JCP, Courtesy of Bloomberg
5 year CDS of JCP, Courtesy of Bloomberg

The red line is simply to illustrate that the CDS has hardly moved the entire time, despite the stock’s decline.  In that sense, credit traders are not as nervous about “cash flow” as stock traders.