J. C. Penney Inc. (NYSE: JCP) has been sliding today, setting a new 52-week low. It's in good company. The entire retail sector is flailing after the Labor Department reported that applications for jobless benefits rose to 337,000 last week, the largest amount since early February, leading investors to fear that consumer spending could tighten even more as we head into the holiday season.
Also lending to the department store's woes, competitor Bon-Ton Stores Inc (NASDAQ: BONT) warned on Wednesday that the company would likely miss 2007 earnings estimates. If you think that these factors are enough to weigh down J. C. Penney's stock over the next few months, then now could be a good time to take a look at a bearish hedged trade on JCP.
The stock has been sagging over the past five months, dropping especially sharply over the past week. JCP opened this morning at $57.07. So far today, the stock has hit a low of $56.76 and a high of $59.15. As of 2:45, the stock is trading at $56.85, down $2.36 (-3.99%). The chart for JCP is bearish and steady, and 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 $75 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 leverages nice returns. For this particular trade, we will make a 6.4% return in 3 months as long as JCP is below $75 at January expiration. JCP would have to rise by more than 31% before we would start to lose money on this trade.
For a bearish hedged play on this stock, I would consider a January bear-call credit spread above the $75 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 leverages nice returns. For this particular trade, we will make a 6.4% return in 3 months as long as JCP is below $75 at January expiration. JCP would have to rise by more than 31% before we would start to lose money on this trade.
JCP has not been above $75 since July and has shown strong resistance below $70 over the past several weeks. This trade could be risky if retail numbers are surprisingly strong this holiday season, but even if JCP swings to the upside, it could encounter more resistance from its 50-day moving average, which is at $65 and slipping.
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Reader Comments (Page 1 of 1)
11-07-2007 @ 6:53PM
Hugh said...
Wish I had some loose cash, would be a great time to buy stock in JCP. This lull in the stock price is only temporary and I feel the stock will make a rebound real fast. However, owning over 600 shares now I am hurting a little bit. But still have confidence in a fast rebound.