Thursday, February 24, 2011

Trade of the Day: JCP March 36/37 short strangle

The Trade
Per a reader's request, the trade of the day is a short strangle in JCP. A trader sold 173 March $37 calls at $1.07 and sold 173 March $37 puts at $1.53 for a credit of $2.60 or $44,980.

As you can see from the graph above, the strangle has limited profit potential, and unlimited risk in either direction. The maximum profit potential is the credit of $44,980. The lower and upper break even underlying prices at expiration are $33.40 and $39.60. Knowing the characteristics of short strangles, the passage of time helps, a large move in the underlying hurts, and an increase in volatility hurts.

The 52-week range for JCP is a low of $19.42 and a high of $37.48. J.C. Penney Company, Inc. reports earnings tomorrow before the opening. JCP traded 16,790 contracts today compared to average volume of 12,790. According to Google Finance, JCP has a higher Price-to-sales ratio of 0.49 compared to competitors SHLD and M. SHLD reported earnings before the open today and shares have dropped 5.54%.

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