Thursday, August 14, 2014

* J C Penney (JCP) - Earnings Preview: The Risk of Equity Default, Speculation and the Consumer

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JCP is trading $9.66, up 3.3% with IV30™ up 0.7%. The Symbol Summary is included below.

Provided by Livevol

This is an earnings preview, stock price and volatility note.

The risk into this earnings release for JCP is the second lowest it has been for the last eight quarters.  While the most recent stock rise (70% in five-months) has brought interest back into the stock (not necessarily the company), the move before that was a 90% downturn which is not a 'valuation correction,' it's a signal of potential equity default.

This earnings cycle we have a lot of consumer / retail information to look back on from the monthly data release yesterday.This has been the week of the consumer, as we knew it would be (Preparation: Must Know for the Week to Come). Thus far, it ain't lookin' real good.

Let's jump into the analysis for today. Let's turn to the three-year stock chart for JCP.
Provided by Charles Schwab optionsXpress

Overall the stock is down 64%, but it has seen three cycles.  The most recent trend is a 71% rise since 2-25-2014, and it's that move that has regained interest in the stock.  At the lows, questions of solvency were legitimate and swirling.  It seems that risk is mitigated for now, but just remember, if something goes a little wrong at JCP, that stock price can literally go to zero ($0).

The cycle before that rise from near bankruptcy showed a 90% drop (ish).  Again, don't forget that.  When a stock drops that much, it's much more than a 'valuation correction,' it's a measure of potential equity default.

Let's turn to the risk in JCP earnings, explicitly by looking at the IV30™ chart in isolation, below.

Provided by Livevol

The implied volatility is the forward looking risk in the equity price as reflected by the option market (IV30™ looks forward exactly 30 calendar days).

In English, the red curve is the risk in future stock price movement.  The blue "E" icons represent earnings dates and we can see (little yellow circles) that the 'risk' level today is lower than six of the last seven earnings cycles.  That feels low...

For those that like speculation, JCP earnings offers that opportunity.  Note that I wrote speculation, not investing.

Finally, the Options Tab is included below.

Provided by Livevol

Using the at-the-money (ATM) straddle we can see that the option market reflects a price range of [$8.40, $10.60] by the end of trading on Aug 15th (tomorrow).

  • If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
  • If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
  • If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.

The Sep options show a price range of [$8.40, $11.60] using the $10 strike as ATM.

This is trade analysis, not a recommendation.

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