J. C. Penney Company, Inc (NYSE: JCP) stock is plunging this morning as the company cut its Q3 outlook after widely missing September same-store sales estimates. J.C. Penney now expects to report profit of $1 per share to $1.04 per share in the third quarter, compared with a previous outlook for profit of $1.28 per share, while analysts have been expecting earnings of $1.29 per share. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on JCP.After hitting a one-year high of $87.18 in February, the stock fell to a one-year low of $61.54 in August. This morning, JCP opened at $68.48. So far today the stock has hit a low of $64.08 and a high of $68.48. As of 10:45, JCP is trading at $65.05, down $2.95 (-4.3%). The chart for JCP looks neutral and was improving until today, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.
For a bearish hedged play on this stock, I would consider a January bear-call credit spread above the $85 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. This particular trade will make a 4.2% return in 3 months as long as JCP is below $85 at January expiration. JC Penney would have to rise by more than 30% before we would start to lose money.
JCP has not been above $85 since February and that foray above that level lasted only about one week. The stock has shown some resistance around $69 recently. This trade could be risky if the retail market turns around and JCP's earnings (due out in mid-November are a positive surprise, but even if that happens, this position could be protected by the resistance the stock formed around $70 over the past few months.
Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: At publication time, Brent neither owns nor controls positions in JCP.
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Reader Comments (Page 1 of 1)
10-11-2007 @ 3:02PM
Tanya said...
It is no surprise to me that JCPenney sales are down. Our local large mall-located store recently closed and two smaller community-shopping center stores opened in its place. Neither of them carry the same quality or quantity of merchandise that the larger store carried. They lost me as a consumer!!!!
10-19-2007 @ 8:18AM
TIM MCELWAIN said...
With leaders that have no merchandise buying experience (Ken Hicks and Jeff Allison) JCP will continue to struggle. They are changing to fast and have forgotten about the core JCP customer. Their are now more designers than Buyers at JCP. That in it self clearly indicates a disaster waiting to happen. They are not breading merchants but rather accountants. Mike Ullman is totally dis-engaged from the retail business. He is to busy trying to politic with the Ralph Laurens of the world. Where is Charles Chinni. JCP would never miss sales if he were promoted to the post that Ken Hicks now holds.
Hold on it is going to be a bumpy ride. I'm putting my money on Kohl's.
10-26-2007 @ 9:47AM
Laurence Hellman said...
Ken Hicks (JCP CEO) can hardly be called an "accountant". A superb strategic planner and thinker, Ken leveraged his McKinsey consulting experience before merchandising the home and center core businesses for May Department Stores.