Thursday, March 10, 2011

Trade of the Day: JC Penney's April $37/$35 ratio put spread

The Trade
A trader sold 5,000 April $35 puts at $0.96 and bought 2,500 April $37 puts at $1.76 for a net credit of $0.16 or $40,000.

As you can see from the graph above, the ratio put spread has limited risk and limited reward. The max profit potential would occur at an underlying price of $35 at expiration. At $35, the short puts would expire worthless and the long puts would be exercised. The lower break even price level is $32.84 at expiration.

The line shown is the lower break even at expiration. JCP last traded below this level on March 8th, 2011. JCP traded 13,462 contracts today compared to average daily volume of 12,994. JCP hit a new 52-week high as it traded at $37.49 compared with its previous 52-week high of $37.48.

J.C. Penney Company, Inc. operates a network of department stores in the United States and Puerto Rico. The company has a P/E ratio of 16.3, below the average retail industry P/E ratio of 21.6 and below the S&P 500 P/E ratio of 17.5.

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