Options Trading News

November 20, 2013  Wed 12:20 PM CT

J.C. Penney offered investors a glimmer of hope, and the bulls are piling in.

optionMONSTER's Heat Seeker monitoring system detected the purchase of about 15,000 March 11 calls for $1.18 and the sale of a similar number of March 8 puts for $1. Volume exceeded open interest at both strikes, indicating that new money was put to work on the long side.

These long calls lock in the price were a stock can be purchased, while selling the puts earned cash to finance the upside bet. Combining the two is highly bullish, allowing the investor to command significant leverage from continued gains in the stock.

The position has a delta of 0.70, meaning that they'll collect $0.70 for every $1 that JCP climbs, but they paid just $0.18. Over $11, their gains will be an even one-for-one, so a move to $13 would hand them a return of $1.82--more than ninefold profit from the shares climbing less than 40 percent. They also have downside risk because of the short puts. (See our Education section)

JCP is up 6.43 percent to $9.27 in afternoon trading. While its third-quarter loss was wider than expected, management said business is improving in November and sees ample liquidity on its balance sheet.

The stock peaked over $40 early last year but fell as rivals such as Macy's took customers and sales crumbled at a double-digit pace. Back in October, JCP touched its lowest price in at least 29 years.

Total option volume is quadruple the daily average so far today, according to the Heat Seeker.
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The covered call and unhedged risk

I have written a few things on the Covered Call Strategy over the last two weeks. Please understand that those two previous articles plus this one do not constitute a proper, fully in-depth lesson on the Covered Call Strategy like we have in our classes at Option Monster Education. I have picked out a few topics that I believe were worth noting and today I am going to add the final one.

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