Big Printin’ – JC Penney & Co. (JCP)

by Dan February 22, 2017 3:37 pm • Big Printin'

It’s been a tough few years for department stores. The investment world is clearly wondering if we need Macy’s and Dillard’s, Saks Fifth Avenue and Nordstrom, Kohl’s and JC Penny in the same world as We all know these companies need to dramatically expand their omni-channel offerings and reduce their bricks and mortar footprint to stay alive. Some will. But all those brands are not necessary when as a group they’re all competing with a one behemoth brand. My prediction? 2017 will be the year of the forced merger in the department stores as they face their existential crisis.

Which leads me to JC Penney. JCP) has been in an existential crisis for years. Its shares are down nearly 90% from all time highs made in early 2008 and down about 83% from its 2012 highs:

JCP 10 year chart from Bloomberg

Which brings me to some options activity today in JCP in front of Friday morning’s fiscal Q4 earnings report. There were two different trades that caught my eye. First when the stock was trading $7.03 shortly after 1pm a trader bought to open 7,500 of the March 3rd weekly 7 puts for 35 cents. These puts break-even at $6.65 on March 3rd close, down about 5% from the trading level. These puts look to be a roll out of 4500 of the Feb 24th weekly 7 puts that were sold to close over the course of the day for an average near 25 cents.

The implied move in the options market for earnings this week is about 8.5%.  These puts might be used as a dollar cheap hedge against a long position, or an outright bearish bet as the stock tests prior near term technical support/ resistance at $7 and is now about 10% from its 52 week lows made in late January.  While $7 is definitely a level so to speak, the next downside target might be the Jan 2016 spike bottom low at $6:

JCP 1yr chart from Bloomberg

Before your get all geeked up about pressing the short, I’ll remind you that short interest sits at 24%. Take a quick look at the stock’s late February/ early March surge (that marked a near 100% gains from the Jan lows) to see what happens when those shorts feel trapped.

Second, there was some serious call buying when the stock was $7 just before 3pm… a trader bought 10,000 Feb 24th 7.5 calls for 13 cents, while also buying to open 25,000 March 7.50 calls for 25 cents and also bought to open 20,000 April 8 calls for 26 cents.  Obviously we have no idea what the intent of either of these trades made be, but in this last instance it could either be dollar cheap protection for a short or maybe on the flip side a trader playing for a near term short squeeze.