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.

Risk/Reward

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.

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.

Risk/Reward

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%.

Option Flow Recap for Febuary 9 2011

Macro / Thematic

IWM – 30,000 of the April 72 puts were bought for $0.95 to open.

GDX – 10,000 of the February11 (weekly) / February (regular expiration) 57 call spread was bought for $0.43. The weekly option appeared sold at $0.25 to open and the regular February option appeared bought for $0.68 to open. The investor is betting the shares of GDX remain below 57 for the rest of the week before moving higher into next week’s expiration.

FXI - 7,500 Feb 41/42 put sreads bot to open

EEM - 20,000 May 36 puts sold @ .40 10,000 April 43 puts bought @ 1.1 (possible roll up and out)

Consumer

JCP – Over 5000 of the March 35 / 31 1x2 put spreads were bought to open as the stock hits a new 52-week high. The trade appears to be a short term hedge as the stock has made a 15.6% move over the past four days.

M – Options were active in Macy’s today with almost 20,000 calls and 7700 puts trading. Most of the early action was bullish with call buyers active in the February 25 and 26 calls.

SCSS – An investor sold 6000 June 7.50 puts at 0.275

F – 15,000 March / May 17 call spreads traded for $0.48. The trade appears to be a roll out two months.

SLE – 17,000 March 17 puts appeared bought today (99% traded on the offer). The company’s stock has been under pressure since the company announced that it was planning to split into separate companies rather than put itself up for sale.

BBBY - 1500 March 50 calls bought at $1.18

Energy

EPD – Bearish trade in Enterprise Products Partners where May 40 - 44 bullish risk reversal, bought at 40 cents, 3800x after news of a fire at a Houston plant.

SOLR – February 10 calls were active today with 6500 trading on the day. While early action appeared to be call buyers, the overall action appeared to be both ways.

PPL – 800 July 24 puts were sold to open at $1.05

HNP – 700 March 22.5 calls were sold $0.30.

TMT

ATML – Bullish post earnings trade: 25,000 lot block of May 17 calls bought for 1.40 versus a sale of 15,000 Feb 13 calls for 3.40.

NOK – 6000 July 10 / 8 put spreads were bought for $0.275

ALU – February 3.5 calls are active today with 7800 trading. The company reports tomorrow 2/10.

NTAP – 8000 of the February 65 calls appeared sold at $0.35. earnings on 2/16

YHOO – 10,000 April 17 / Jan 17.5 call spread was bought for $1.10,

Industrials / Materials

USG - An investor apparently sold 2,250 February 17.5 calls at $1.425 to appear to buy to open a May 19 / 22.5 calls spread for $1.30

PCX – 4000 March 25 calls were bought for $1.40

YRCW – 37,000 April 2.5 puts were bought for $0.27. The puts were bought to open

Financials

CBOE – Speculative call buying was active in CBOE following news the NYSE Euronext (NYX) and Deutsche Boerse are in advance merger talks. Almost 15,000 calls and 5000 puts traded on the day. 

KFN - Buyer of 3k March 10 calls @ $0.60 and 5k March 11 calls @ $0.20

Healthcare

THC – Over 5000 of the March 7 calls appeared bought in a multi exchange sweep.

*Special thanks to Option Radar, BMO Capital, LiveVolPro, CBOE, Option Monster, and all of the options desks and traders we work with for pointing out the option flow!