Traders Load Up on Puts in Microsoft, J.C. Penney

Pessimism on leading retailers has become old hat for option traders -- no matter how many "new hats" embattled store chains try to toss in consumers' path. With that in mind -- and with earnings due out by week's end -- it's little wonder to see implied volatility heat up in JC Penney's (JCP - commentary - Cramer's Take) options.

What continues to astound is the deep and abiding downside in this department store stock, which lost more than 11% of its value to read $19.84 heading into the close. This brings Penney's to within $2 of its 52-week low, the market having had four days to ruminate over its poor October same-store figures and with four days yet to go for the unmasking of its third-quarter numbers.

J.C. Penney options traded at three times the normal level today, with traders positioning provocatively in out-of-the-money December 15 puts. Volume at this strike added up to triple the open interest today as the value of the deep-downside contract rose nearly 55%. Even with the price reflecting only about a 17% likelihood of this position landing profitably by Dec. 19, it was still the most actively traded contract on the J.C. Penney calendar today.

With drama deferred over any renewed takeover bid for Yahoo! (YHOO - commentary - Cramer's Take), option traders are back to looking at the cold, hard fundamentals at Microsoft (MSFT - commentary - Cramer's Take). Shares were reading down about a percent heading into the close at $21.33, with heavy buying pressure throughout the session today in November 20 puts. The equivalent of some two-thirds of the 66,000-strong open interest at this defensive strike was actively traded today, most of it being bought on the offer at about 41 cents per contract. This in turn brought a decidedly vinegary tint to the options action in Microsoft, with 68% of today's volume qualifying as bearish or neutral. Front-month options in Microsoft are pricing in as much as a $1.84 price move between now and expiration - that's about an 8% slice of today's closing price.

---

At the time of publication, Darst had no positions in the stocks mentioned.

Rebecca Engmann Darst is the Portfolio Manager for TheStreet.com?s Options Alerts Portfolio newsletter and an equity options analyst for RealMoney Each Thursday at 6:30 a.m. EST, she delivers the early-morning lowdown on option volume and sector trends on CNBC's "Squawk Box." Prior to her work in the equity options market, she spent seven years in Scandinavia as a Copenhagen-based chief reporter for a European Commission news service, correspondent for Spanish daily El Mundo and Radio Netherlands, followed by stints at Nordea Bank and Saxo Bank.