Options Feeding Frenzy Erupts at J.C. Penney

JCP – J.C. Penney Co., Inc. – Shares of the third-largest department store chain in the U.S. surged 7.1% today to secure an intraday high of $33.88 on news Pershing Square Capital Management LP, a New York hedge-fund firm run by William Ackman, disclosed a 16.5% stake in the retailer. JCP’s shares rallied yesterday as well after the department store operator said same-store sales increased 5.1% last month. Investors made a beeline for JCP options right out of the gate this morning. Optimistic traders looking for shares to climb higher ahead of January 2011 expiration initiated three-legged bullish spreads. Investors purchased roughly 4,000 in-the-money calls at the January 2011 $30 strike for an average premium of $5.29 each, sold about the same number of calls at the higher January 2011 $40 strike for a premium of $0.96 apiece, and sold 4,000 puts at the January 2011 $28 strike at an average premium of $1.31 a-pop. The net cost of the three-legged transaction amounts to an average of $3.02 per contract. Thus, bullish players employing this strategy make money if the retailer’s shares exceed the average breakeven price of $33.02 through expiration day next year. Maximum potential profits of $6.98 per contract are available to these traders should the price of the underlying stock jump 18.05% over today’s high of $33.88 to trade above $40.00 by January expiration. Finally, a number of investors purchased put spreads in the November contract, perhaps to lock in the rally in the retailer’s shares. One such put player appears to have purchased a 2,500-lot November $33/$30 put spread at an average premium of $1.30 per contract. The transaction yields downside protection beneath a breakeven share price of $31.70 through November expiration. Options traders exchanged approximately 84,000 contracts on JCP by 12:12 pm ET.

About Andrew Wilkinson 1023 Articles

Affiliation: Interactive Brokers

Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.

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