Profit From J.C. Penney's Panic Selling

NEW YORK (TheStreet) -- J.C. Penney (JCP) was taken to the woodshed Tuesday after reporting disappointing same-store sales. Investors were looking for considerably better than a 2% improvement. Amazon (AMZN), Wal-Mart (WMT), Sears (SHLD), Target (TGT), Macy's (M), and Kohl's (KSS) continue to refuse any quarter to the battered retailer.

Few in retail are jumping for joy after the last holiday season. Wal-Mart and Target are oversold on the daily chart, and even the unstoppable Amazon hit a brick wall. The entire space sold off much more than the overall market since the beginning of the year. J.C. Penney's stock is in a full blown panic, creating an opportunity for some investors.

This wasn't J.C. Penney's first full blown panic selloff. It probably won't be the last either. But markets don't move straight up or down, they ebb and flow as the emotions of investors shift. Because option premium often jumps as prices in the underlying shares fall, writing options can reward the disciplined investor. You can read my Real Money Pro trade idea with actual entry and exit prices. Today's trade idea is only one of several that have made money from this retailer. (If you don't have a subscription for Real Money Pro you can get a free trial.)

Fading extreme moves is how I trade every day. For example, my last trade idea was with Zynga (ZNGA). I bought shares in Zynga about three weeks ago after an analyst downgraded the stock. Zynga is now trading over 30% higher.

The question every investor needs to ask is if the company's stock is under, over or correctly priced relative to its prospects. If the price and value are not in equilibrium, how long before the rest of the market figures it out?

These questions bring us back to the panic selling and how they impact upon price and value. J.C. Penney the company isn't worth 12% less at the end of trading Tuesday compared to the start, but when someone is drowning they're not thinking clearly.

For investors watching their portfolio evaporate into thin air and shares crossing below $5, the true value can become irrelevant, and survival becomes the focus. If you examine an intraday chart, you will notice that the 10-minute bar when the stock fell to $4.90 was the highest volume of the day. The weak hands were washed out and new buyers stepped up.

Sadly for those who hit the panic sell button and gave up their shares for under $5, they then had to sit and watch the same shares bounce over 25 cents higher before settling to close at $5.08. Needless to say, more than a few people were frustrated by closing. They may have been frustrated by the stock but not all the news from management was frustrating. Online sales climbed 26.3%.

The worst-performing 33 stores will soon close. Over 25% of the stores slated for the glue factory are in Wisconsin. I'm not sure why so many poorly performing stores are located there but the one located near me appears in better shape than the Sears. Granted, that doesn't say much. Bbut during my walk-throughs, I looked for signs of trouble but didn't see any that couldn't be found in Macy's or Kohl's.

Ok, so how can you profit from the panic? There are two short-term strategies that are attractive to me.

The first is selling a covered call, as outlined in my Real Money Pro post. The second is selling a cash secured put option. The February $4 strike put option can be sold for about 20 cents. The shares have to drop over 25% in the next 17 days for the buyer to breakeven. Not only do I not think shares will fall to such a degree (remember, shares don't go straight up or down), I think we can expect the $5 area to provide support.

Another longer-term approach is selling an August $6 covered call for about $1.05, for a net cost of $4 per share. If the shares are at or above $6 on expiration day, the return is 50% in six months and the trade is profitable as long as the shares are at least $4

At the time of publication, Weinstein is long JCP and ZNGA.

Follow @RobertWeinstein

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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