J.C. Penney Stock Will Move Lower Again -- You Can Profit Using Stock Options

J.C. Penney (JCP)  shares rallied Friday after the retailer reported quarterly results. The gains aren't likely to last, however, and investors can use stock options to profit from a short-term decline in the stock.

The company's adjusted loss per share, of 21 cents, was in line with the Wall Street consensus. Elsewhere, though, the quarterly report surprised, and not in a good way. Net sales of $2.85 billion missed the analysts' consensus of $2.95 billion, according to CNBC. Comparable-store sales declined even though analysts had expected them to increase.

The report comes on the heels of largely negative and worsening fundamentals for J.C. Penney. The company has not paid a dividend for several years. Revenue has been rougly flat for the last four years and has declined significantly over the last 10. The company has reported a net loss for the past five fiscal years. 

The current chart reveals a puzzling level of optimism, perhaps because the company's bottom line met expectations in the latest quarter after J.C. Penney had missed estimates in several quarters. 

The chart also reveals three reasons that price is likely to move lower again in the short term. The bearish channel established mid-September defines a falling trading range between the middle and lower Bollinger Bands. The stock made a strong bullish gap on Thursday, the day before the quarterly report.

On Friday, the stock's price moved above the upper Bollinger Band, signaling a likely retracement back into range. Finally, the exceptionally large volume spike on Friday was the biggest in the last six months.

Although price patterns don't always repeat, the combination of the upper Bollinger Band violation and the volume spike looks very similar to the mid-August pattern, where the same two events were followed by a price decline that lasted until just a few days ago.

This is very bearish looking, both fundamentally and technically. With this in mind, buying put options makes sense. Two are worth looking at. The put options that expire Nov. 25 (in 11 days) include the put with the $9 strike. This put option closed Friday at an ask price of 0.26. Including trading fees, a single contract will cost $35 and the break-even level will be $8.65 per share (strike of $9 minus 0.35). The potential problem with this contract is that with only 11 days to go, a mild price decline would be offset by a drop in time value.

As an alternative costing only $10 more, look at the Dec. 2 expirations, which expire in 18 days. The same 9 put closed on Friday at an ask of 0.35, or total cost of $44 with trading fees. The break-even level is $8.56 per share. This price would be close to a retracement back to the previously established bear channel.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

Besides blogging at TheStreet.com, Michael Thomsett also blogs at Options Money Maker, the Top Advisor's Corner at Stockcharts.com, and Seeking Alpha. He has been trading options for 35 years and has published books with Palgrave Macmillan, Wiley, FT Press and Amacom, among other publishers. He is working on a new book on options math, to be published by Palgrave Macmillan in 2017.

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