JCP shares slid into the low $12 range into the big liquidation by activist Ackman and then bounced as high as $14 as optimism grew that the new (old) CEO could turn things around. That buzz seemed to pass quickly and shares dipped below $10 this week while put volume and implied volatility have exploded. More than 28,000 January 5 strike puts have been opened this week, suggesting a very dire outlook for the retailer. One simple way to think of this type of option flow is Professor Peter Carr's "DOOM" (Deep-Out-Of-the-Money) put metric. I worked with Peter for years and while 90% of his quantitative modeling was over my head, this idea is very simple: take the price paid for a far downside put as a proxy for the probability of default by expiry. On a $10 stock this means a $5 put bought for $1 (that's what someone paid for the JCP January15 5 puts yesterday) implies a 25% chance of default- since the $1 would pay off with $4 in profits if JCP share price went to zero.
Another way to see the dire concern is in a sharply increasing implied volatility and put/call skew- basically implying a fat-downside-tail to the probability distribution for the options- JCP skew in the October options is very steep- with puts about 16 IV points above calls.
This type of dire concern can create a death spiral as the company loses credibility with lenders and vendors, and business costs start to spiral upward. While it's still possible the some sort of white-knight comes along to take JCP private or otherwise revive the business, the options flow suggests more of a view to the downside- and with ATMIV near 91% we can expect plenty of 5% daily swings to keep traders on their toes.
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