Options report: Guess where the bears are shopping

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JC Penney’s having a rough decade.

The 115-year old department store’s suffered two major selloffs since 2010. It first crumbled from the $30s to the $10 range between 2012 and 2014. Then between late 2016 and late last year, the stock spiraled from $10 to $3.

The bears were back in a big way on Friday, apparently looking for another leg to the downside. More than 35,000 May 4 puts were bought throughout the session, with premiums rising from $0.88 to $0.97.

Puts fix the price where a stock can be sold, so they can appreciate when shares decline. For example those May 4s will roughly double in value if JCP loses about one-third of its value by expiration. (Should it rally above $4 they’ll expire worthless.)

Another benefit of puts is that there’s limited risk in the event of a rally. (See our Knowledge Center for more.) Unlike short-selling, the trader can only lose their initial outlay. That can be prudent in a name like JCP, which already has massive bearish positioning based on short interest.

JC Penney (JCP) chart
JC Penney (JCP) chart

E-commerce, weak mall traffic and a debt-choked balance sheet are the main culprits. Management has tried to staunch the bleeding with store closures, but seems to be having less success than smaller peers like Abercrombie & Fitch (ANF) and Lululemon (LULU).

JCP ended the session down 4.75 percent at $3.21. The last big blow came on March 5, when weak guidance pushed the stock below its 50-day moving average. That could make some trend followers expect further selling pressure.

Total option volume in JCP was triple the monthly average on Friday. Puts outnumbered calls by a bearish 11-to-1 ratio.

DISCLAIMER: Options trading may not be suitable for all investors.

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David Russell is VP of Market Intelligence at TradeStation Group. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.