JC Penney Company, Inc. ( JCP ) muscled higher on Friday, toppling its 10-day moving average for the first time since July 16. From a longer-term perspective, the shares -- last seen at $16.59 -- have given up roughly 28% over the past year, and option traders are bracing for more downside.
During the course of Friday's session, JCP saw about 22,000 puts change hands -- a 76% mark-up to its average daily put volume. Traders established new positions at the out-of-the-money January 2015 10-strike put, which saw open interest increase by more than 3,500 contracts over the weekend. Plus, 70% of the LEAPS crossed on the ask side, suggesting they were bought.
By purchasing the puts at a volume-weighted average price (VWAP) of $1.36, the buyers expect JCP to breach $8.64 (strike price minus VWAP) by early 2015. In other words, the traders are betting on JCP to lose nearly half its value over the next year-plus, and sink to record lows. Risk, meanwhile, is capped at the initial premium paid for the puts, should JCP remain in double-digit territory.
Since the puts are so far out of the money, it's possible that JCP shareholders purchased the contracts to hedge their bullish bets. By buying options insurance , the traders lock in an acceptable price at which to sell their JCP shares ($10 apiece), should the stock take a turn for the worse.
Friday's appetite for puts is just more of the same for JCP. On the International Securities Exchange (ISE), Chicago Board Options Exchange ( CBOE ), and NASDAQ OMX PHLX (PHLX), speculators have bought to open almost three JCP puts for every call during the past two weeks. What's more, the resulting 10-day put/call volume ratio of 2.71 sits just 2 percentage points from a 12-month high, suggesting option buyers are picking up bearish bets over bullish at a near annual-high clip.
Still, the security's Schaeffer's put/call open interest ratio (SOIR) of 0.78 indicates that calls outnumber puts among options with a shelf-life of three months or less. This ratio stands higher than just 15% of all other readings of the past year, implying that JC Penney Company, Inc. near-term traders remain more call-biased than usual.
This article by Andrea Kramer was originally published on Schaeffer's Investment Research .
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