Trade $JCP – Taking Profits Ahead of Earnings And At Technical Resistance

by Enis May 15, 2013 11:19 am • Commentary

Trade Update May 15, 2013: JCP is up 8% so far this week as the stock rallies ahead of its earnings event tomorrow.  My target for the upside was in the 19.50-20 area, which is where JCP started the year in 2013.  My initial inclination was to hold on to this trade through the earnings event, but since the stock has rallied into the event, so expectations are higher than they were last week, leaving more room for disappointment on the event.  Going forward though, I think the JCP story has turned, and will be a buyer on dips if we get them.

Action:  Sold to close the JCP ($19.03) June 16 / 20 Call Spread at $2.33 for a $0.99 gain

Original Trade May 7, 2013, 1:49 pm:  

JCP is a name we’ve picked on over the past couple weeks for multiple reasons:

  1. It’s one of the few high short interest stocks that has failed to rally in the past 3 months.  It still sports a short interest around 38% of the float.
  2. Soros announced a 8% stake in the company, a small position for him, but big for the company, especially when combined with the recent financing led by Goldman Sachs.
  3. The corporate bonds continue to rally even as the stock stagnates.

However, all of those factors are well known, yet the stock continues to lag the overall market, as sales numbers have been anemic for a year now.  But that’s also well known, and the huge short interest reflects that pessimism.  The setup seems like a case of, bad news is expected, good news would be a surprise.  So we have an underlying bullish bias, but want to let the technicals be our guide on the entry and exit for this name.  That was the thought process behind last week’s trade in JCP.

With the stock back down this week, and close to where we placed an entry last week, we want to put on a bullish bet again, but this time with a longer time frame, playing for a larger move higher.

TRADE:  JCP ($16.52) Bought the June 16 / 20 Call Spread for $1.34
  • Bought 1 June 16 Call for 1.67
  • Sold 1 June 20 Call at 0.33

Break-Even on June Expiration:

  • Profits of up to 2.66 between 17.34 and 20, max profit of 2.66 at 20 or above
  • Losses of up to 1.34 between 16 and 17.34, max loss of 1.34 at 16 or below

Trade Rationale:  I decided against entering another long May call option position since there are only 8 trading days left until May expiry.  Rather, I wanted to give myself more time for the stock to move higher, and I think $16 is important support going forward, so the entry on the selloff today is decent.  The stock started the year near $20, so I foresee the stock running into serious resistance there, which is why I sold the 20 strike call in June.