J.C. Penney reports earnings after the bell today, and a large spread is positioning for a possible pullback.
JCP is down 1.67 percent this afternoon, trading at $32.98. The department-store operator is back to support that has been in place for all of 2012 after trading just shy of $27 at the end of April. It has been trending lower from its 52-week high of $43.18 set in early February.
A trader bought 5,000 June 32 puts for $1.75 while selling 10,000 June 29 puts for $0.73. the volume a both strikes outpaced the open interest, so this a new put spread.
The ratio spread costs the trader only $0.27, which is what is at risk if JCP remains above $32. The maximum gain comes if it trades down around $29. Below that level, the trader faces assignment and the obligation to buy shares.
The trade also takes advantage of the high implied volatility that is usually seen going into an earnings announcement. (See our Education section)
The option volume of 60,000 in JCP so far today is already 3 times its daily average in the last month.
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