NEW YORK ( TheStreet) -- After imploding by more than half from the start of the year, buying J.C. Penney ( JCP) may feel like stepping out on railroad tracks and stopping a freight train with your hand.
If you're too early, your account can get trampled faster than you can say "margin call," as many have found out. That's the reason why I've been critical of J.C. Penney, especially after they blindsided investors with a 38% share dilution that sent shares falling to multi-year lows. But as the facts change, so must our opinion.
The financial situation is the same, not much has materially improved, but instead of paying over $10 a share, we can now buy the retailer for under $8.50. In fact, I will show you how you can lower your risk to under $7 a share while leaving room of a possible 10% gain in about three months.
A patient and disciplined investor can use market fear of never-ending losses to their advantage by waiting until the dust settles and enough weak hands have thrown in the towel that the stock essentially "runs out of sellers."
Of course, every trade has a buyer and seller, but we also know that when buying pressure increases and demand outstrips supply, the overall price of shares will move higher. That's exactly what we are witnessing now with J.C. Penney, and we can expect it to continue.
Last month, I gave an opinion that selling $8 strike put options provided a positive expectancy based on the outsized premium in relation to potential risk. After almost six weeks, option writers have been rewarded with considerable time decay. The November strike is about to expire, but that doesn't mean this trade is over.
Clearly, J.C. Penney has a full plate of challenges. Kohl's (KSS) Macy's (M) Sears (SHLD) Target (TGT) and Wal-Mart (WMT) are not about to relinquish the non-stop implicit collusion that all department stores have against each other as they individually strategize to gain every possible edge.
It's the same highly competitive market space that led Goldman Sachs (GS) to warn J.C. Penney bond holders to buy insurance against default, known as collateralized debt obligations because of fear of default within the next couple of years.