Trade Update $JCP: Closing Aug Reg/ Wkly Call Calendar For A Quick Winner

by Dan August 16, 2013 1:27 pm • Commentary

When I opened this JCP Aug17, Aug 23rd 14 call calendar more than a week ago I was targeting a move back towards $14 with one trading day to their highly anticipated Q2 earnings Tuesday morning.  At this point I have this position right where I want it where the call that I am short is expiring today and will likely be worthless, and the next week call that I am long has appreciated from the directional move, and from a implied vol increase. SoI have a decision to make,  close the position for a gain today, or let ride into next week’s earnings event.

The implied move in the options market for earnings is about 15%, and frankly I could see it up or down 10% easily but not willing to pick a side at the moment.  Given how much noise there has been in the stock in the last week, I am going to take the money and run.   With the stock at $13.55 I can sell the calendar at .78 for a .33 gain.

Action: JCP ($13.55) Sold to Close Aug17th / Aug 23rd 14 Call Spread at .78 for a .33 gain.



Original Post Aug 7th, 2013:  New Trade $JCP:  Option Pricing Not Fair or Square

Add a very bad week onto what has been a nightmare year for JCP.  The stock is down about 22% since the press cited unnamed sources last week that CIT, leasing firm that does vendor financing may be holding back credit to JCP, potentially causing shortages of product in front of their back to school and holiday seasons.

Traders Smell Blood:

Well, the jury is still out on whether or not JCP is facing a cash crunch but one thing is certain, traders are starting to hear the “death rattle” for the beleaguered retailer. Yesterday, someone bought the Jan2014 10/5 1×2 put spread, 8,000 by 16,000x for .79.  This trade could have been an outright bearish bet or protection against long stock, but if you were playing for the lights out trade in JCP this is a fairly brilliant way to do it.  The break-evens on the trade are 9.21 and .79, btwn those 2 levels the trader can make up to 4.21 with the max gain of 4.21 at 5.00.  By no means is the 1×2 cheap and in some ways I might have been more inclined to look out a whole ‘nother year to 2015, where the Jan15 10/5 1×2 put spread could be bought for close to 1.00, making the break-evens 9.00 and 1.00 with max gain of 4.00 at 5.00.   Interestingly the trader who bought the Jan14 spread yesterday rolled the exact size and strikes to one month out to Feb 2014.  He must have traded the wrong expiration yesterday as this is highly unusual for someone to do so a unique trade and then a day later close out to duration just one month out.  The company usually holds and analyst meeting in late January so it is unlikely that Jan expiration would have caught the potentially volatile event.

Aside from the stock’s decline there are fairly extreme signs in the credit market for JCP, the 5 year cds in the company has blown out, up to new all time highs, and up more than 300 bps since July 22nd (below).

JCP 5 yr CDS from Bloomberg
JCP 5 yr CDS from Bloomberg

The situation ain’t great, the company’s selling strategy of the last 18 months that alienated long time customers has been abandoned. Their high profile former CEO charged with transforming the retail experience as he did over the last decade at AAPL was a failure and gave way to a prior JCP CEO who was also draped in failure. And to be frank, there seem to be very few identifiable catalysts on the horizon.

Q2 Earnings / Sentiment:   

Heading into JCP’s Q2 earnings Aug 20th (prior to the open) the options market is implying a one day earnings move of ~17%, which is more than double the average over the last 4 qtrs,

Here is about the only good part of the story, sentiment is horrible (Wall Street analysts have 7 Buys, 9 Holds and  9 Sells), short interest is nearing 52 week highs at 26% and the stock is trading at 12 year lows.   Oh and did I mention that the street (both Buy and Sell side) have been off-sides on the potential earnings recovery.  The chart below shows where the Street expected earnings to be for 2014 last year ~.4.00 but now predicting a loss ~ $4.00.  Cash Burn becoming a big issue and will only become bigger unless than can recapture lost market share fast.

JCP 2014 Bloomberg Earnings Estimates
JCP 2014 Bloomberg Earnings Estimates

Technicals:  The chart is a train wreck in the near term, the pop from late April on big volume corresponded with Soros fund taking a larger stake. The stock continued to rally for a few more weeks presumably with investors seeing the famous hedge funder as a massive vote of confidence.  Since the May highs, the stock is down almost 35% as it seems like there has been no shortage of bearish fundamental data-points.  The stock has been on a free-fall with no near term support.

JCP 1 yr chart from Bloomberg
JCP 1 yr chart from Bloomberg

The long term chart since inception (below) isn’t much better except that $10 could be a psychological line in the sand for those willing to make a bet that the top 10 holders,who own close to 70% of the share outstanding will figure out some way to keep this pig afloat.

JCP chart since IPO from Bloomberg
JCP chart since IPO from Bloomberg


My View:  I wouldn’t BUY this stock with your money,  there is an old saying that the only thing u get in this business when you try to pick bottoms, is stinky fingers.  And JCP has the potential to get as ugly as they get.  But given the high levels of implied volatility heading into the earnings event in 2 weeks, there are a couple of options trades that could make a lot of sense to play for a quick bounce back towards prior support.

I want to play for a technical bounce into the earnings event (Aug 20th which falls in Aug 23rd exp), but I want to finance the purchase of upside calls by selling some weeklies (next Fri Aug 17th expiration.

TRADE:  JCP ($12.68) Bought Aug 17th  / Aug 23rd $14 Call Spread for .45

-Sold 1 Aug 17th $14 Call at .20

-Bought 1 Aug 23rd $14 Call for .65

Break-Even On Aug 17th Expiration:

If the stock is below $14, the Aug 17th calls will expire worthless and I own the Aug 23rd $14 calls for .45 which at that point I will look to spread by selling a higher strike call.

The worst case scenario for this trade is that the stock continues to go lower and the Aug 23rd $14 calls become a bit of a lotto ticket into the earnings event as they will have lost value, but vol likely to stay bid or even increase as we get closer to Aug 20th which should help the value of the calls.

Trade Rationale:  As I said above, I am not in the business of getting stinky fingers, and I would not be buying this stock as there are some investors out there who are betting on bankruptcy in the next year or 2 for JCP