Tuesday, June 14, 2011

J.C. Penney (JCP) - Stock Pops on Apple Exec; Is Gamma a Purchase?

JCP is trading $35.35, up 17.4% with IV30™ up 6.7%. The LIVEVOL® Pro Summary is below.


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J. C. Penney Company, Inc. (JCPenney) is a holding company whose principal operating subsidiary is J. C. Penney Corporation, Inc. (JCP). The news that's pushing the stock today, is... well... interesting:

J.C. Penney Co. is tapping Ron Johnson, head of Apple Inc.'s iconic retail stores, as its new president and next chief executive, a rare poaching that was set in motion by a pair of activist investors.

Mr. Johnson, 52 years old, will become CEO in November, succeeding long-time leader Myron "Mike" Ullman. Mr. Ullman, who has been CEO and chairman for six and a half years, will become executive chairman.

The changes were set in motion kick-started by a pair of activist investors who amassed 26% of Penney's stock last year. The investors – William Ackman of Pershing Square Capital Management and Steven Roth of Vornado Realty Trust – won spots on Penney's board and suggested bringing Mr. Johnson on as a director as well.

The stock has popped. The company has traded nearly 190,000 contracts on total daily average option volume of just 11,196. Interestingly, calls have only traded on a 1.4:1 ratio to puts against an average of 1.7:1. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates the action. The Jun 36, Jul 35 and Jul 36 calls are the most active on the call side. For the puts, it's the Jun 34, 35 and Jul 33 lines. Each of those options (calls and puts) have traded more than 5,000 contracts today on substantially smaller OI than trade volume. There's definitely some nice liquidity right now for anyone trying to get on a position.

The Skew Tab snap (below) illustrates the vols by strike by month.

We can see two phenomena pretty clearly:
1. The front month is elevated to the back. Given the news and the approaching expo, that feels about right.

2. The front month upside is bid as opposed to the second month where the skew bends down to the OTM calls. But, before we get too excited, those are really $0.05 or less options to the upside - nothing too crazy.

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

Basically the stock has ripped today and vol has popped with it -- though not as much.

Possible Trades to Analyze
There a lot of ways to look at this -- let's just touch on a few.

1. Calendar spread
The front month vol is elevated to the back b/c of expo and b/c of the news. The ATM front month straddle is priced at ~$1.55. The second month is priced at ~ $3.40. So, you're looking at a about half the value of the back month for three days in the front. Then again, that's short gamma in a stock that's moved ~$5 today, alone.

2. Buy front month vol
Copy and paste the analysis: The front month ATM straddle costs ~$1.65 (giving up some edge). The stock moved $5 today alone.  That gamma might actually be cheap...

3. Sell the second month vol
Jul is priced at ~ 42 vol. HV20 is 30.85 (not including today) and HV180 is 32.95 (not including today). Hypothetically, that could be a vol sale. Then again, the stock just moved 17.4% in six hours.

This is trade analysis, not a recommendation.

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Full Disclosure: I am long options in Jun.
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  1. I think the Apple Stores have been a huge part of Apple marketing. Just walk by one and look at how many people are in there just looking - it's not a place most people dread going to. I don't think Apple's marketing has caused them to be a success, but rather the stores have been as integral a part to their marketing strategy as any other sort of advertising.

  2. It is not a difficult model to maintain. Provide excellent service. Which are customers who buy premium hardware products expect? I’ve never used a Mac in my life but the experience I had with an iPhone defect ensures that it will be a consideration come replacement time.