Bears on the prowl before retail earnings
08/08/17

Kick ‘em when they’re down: Not the best sportsmanship but traders are known to do it.

Just take traditional retailers, many of which have been left for dead this year as the broader market cruises to new highs. The casualty list is long and distinguished, featuring department stores, mall retailers, and shopping-center owners. Even the once-mighty discounters have found themselves on the sell list as consumers flock to the Internet.

One name traders have loved to throw shade at is JC Penney (NYSE: JCP). It began the year on a weak foot as investors priced in a rough holiday season, and continued its southward journey as official results confirmed those worries.1 By May it had established new record lows, and yesterday the bears were back as more numbers approach.

Going to work late on Monday morning, traders bought 17,500 August 5.50 puts for $0.48. An equal number of August 5s were sold for $0.22, but that looks like an existing position being removed. Here’s what it seems to mean:

  • Puts fix the price where a security can be sold – no matter how low it may go. They tend to make money when a stock knifes downward but lose money to the upside.
  • Monday’s trader likely bought the August 5s when JCP was lower and saw their position shrink in value as the stock limped higher. But, they seem undeterred and increased their bearish bet by rolling the position to the higher strike.
  • Making the adjustment cost a net $0.26 per contract, the difference between the $0.48 they paid and the $0.22 they collected. 
  • But then factor in that each contract controls 100 shares and they’ve got 17,500 of them. So the total cost yesterday morning was $455,000.
  • The August 5.50s will be worth $0.50 if the retailer is at $5 on expiration, which just happens to be exactly one week after earnings. At $4.50, they’ll inflate to $1. Should the stock close above $5.50 the entire position will be worthless. Breakeven is around $5.24 based on their net outlay.
JC Penney (JCP), 2/2/17 – 8/7/17, chart

Source: OptionsHouse by E*TRADE

JCP fell 0.92 percent to $5.39 yesterday, and is back near the same area where it traded before crashing in May. Is support now resistance?

Short interest, which represents bets against the common stock, has continued to increase in the name and now accounts for more than 40 percent of its float.2 The bears have been especially bloodthirsty in this name thanks to its toxic trio of weak comparable sales, narrowing profitability, and a mountain of debt.3

Bottom line: JCP is sitting near long-term lows, and some traders are shopping for another drop.

 

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1. Reuters: J.C. Penney holiday sales drop in latest setback to sector. 1/6/17. CNBC: JC Penney's stock hits all-time low on widening net loss, weaker sales traffic. 5/12/17.

2. Yahoo Finance: Key Statistics Page for J.C. Penney, Inc. 8/7/17.

3. Seeking Alpha: Short J.C. Penney. 3/6/17. Credit Suisse: Topline Pressure Persists. 5/12/17.