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November 9, 2012  Fri 11:17 AM CT

JCP: SEE CHART GET CHAIN FIND STRATEGIES
J.C. Penney is down sharply after reporting disappointing quarterly results this morning, and option traders don't see much of a rebound.

JCP is down 5.72 percent to $20.45 in early afternoon trading. The department-store operator now sits in the middle of the day's range after opening at $19.54, near its 52-week low set in July. Shares were above $27 three weeks ago.

There is plenty of option activity in the name today, but one trade in particular has lit up optionMONSTER's tracking systems. A trader sold 10,000 May 25 calls for the bid price of $1.67. The previous open interest at that strike had been just 620 contracts, so this is a new position.

The calls apparently weren't tied to any trading in the stock today, so they could have been sold naked with an initial bearish bias. Or they could have been traded against an existing long position in a covered call position, which would be bullish up to the strike price but would give up any upside beyond it. (See our Education section)
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Sweet Spot Exceptions

As discussed last week, when using the Stock Replacement Strategy to replace a stock position to trade direction, we want to use an option that has very similar characteristics to the stock. We talked about using the deep in-the-money, 80 to 85 delta option that is similar in the Greeks and has relatively little extrinsic value which tends to work against us in stock directional trading.

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