Bears smell blood in retail space
05/09/17

Retail stocks have enjoyed a few months of respite, but now the bears are back.

The sector took a beating in December and January as holiday shoppers flocked to the Internet and shunned traditional brick-and-mortar locales. Department stores were hit especially hard and have been hugging lows despite the broader market blasting to new highs.

JC Penney (NYSE: JCP) is one of the weakest in the space, and options traders moved in for a kill early yesterday morning. They bought almost 14,000 12-May 5 puts for $0.11 to $0.14, guaranteeing the right to sell shares for $5 by Friday's closing bell. That creates the potential for some quick profits if the stock experiences a fast breakdown.

  • The puts will double if JCP drops 14 percent to $4.72.
  • The puts will triple if JCP falls 16 percent to $4.58.
  • Breakeven is around $4.86. 
  • The entire position will expire worthless if the shares end the week above $5.

So what’s the rush? A few things: First and foremost, JCP announces earnings on Friday. Results missed last quarter,1 so the put buyers may expect another heartbreaker this time around. Secondly, it's just one day after rivals Kohl’s (NYSE: KSS) and Nordstrom (NYSE: JWN) report. Last time around, bleak comments from both of those hammered JCP. Finally, two economic reports on Friday could focus on the sector: Retail sales from the Commerce Department and Consumer Sentiment from the University of Michigan.

JC Penney (JCP) and S&P 500, 6-month chart

Source: OptionsHouse by E*TRADE

Then there’s the potentially key $5 level on the chart, near the bottom of JCP’s range since early 2014. Below that, you need to look well back into the 20th century to find any lower support levels.

Don’t forget we’re talking about a junk-rated company in a beleaguered industry. Sure, management has tried to adapt by closing stores. It’s also brought merchandise to shelves more quickly in hopes of carrying less inventory. Some analysts, however, remain skeptical the mall traffic will ever come back.2

Of course, this isn’t new news to many. That’s why short interest (bets placed against the company) in JCP already represent a whopping 34 percent of the float.3 Given how much bad news is already priced in, traders may worry that even a mediocre turn of events could force bears to cover and squeeze the stock higher. Holding puts helps limit the pain if that happens because only the premium paid upfront can be lost.

In summary, bears are coming back to JCP ahead of several events as the stock drifts near long-term lows.

 

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1. Reuters: J.C. Penney holiday quarter sales drop, to shut 130-140 stores. 2/24/17.

2. Credit Suisse: Management Meeting Takeaways. 4/19/17.

3. Yahoo Finance Key Statistics for JC Penney.