GO
Loading...

Why There's Still Hope for JC Penney

Getty Images

The trading in J.C. Penney shares has been pretty rough lately. But the action in the credit and options market may actually suggest that the stock has bottomed.

After the company announced that former CEO Mike "Mike" Ullman would replace Ron Johnson, the stock plunged over 12 percent in Tuesday's session on heavy volume.

But was this really massive vote of no confidence in Ullman? Or were we just seeing one of J.C. Penney's top holders get out of dodge?

"The stock traded 90 milion shares, and the float is 151 million, so it traded 60 percent of the float," pointed out Lawrence McDonald, Newedge Group's senior director of credit sales and trading. "If you do the math, when 60 percent of the float trades, it's almost impossible that one or two of the largest shareholders didn't exit their positions."

(Read More: What JCPenney Needs to Do to Fix Itself)

This matches what McDonald, who writes at LawrenceGMcDonald.com, sees in J.C. Penney bonds. "The credit has been outperforming the equity over the last three to four weeks, and the short end of the yield curve is holding up well, so it tells you that this is a liquidity-driven capitulation takeout of a large holder," he told CNBC.com. "And these capitulation bottoms are typically very good buying opportunities."

Meanwhile, the action in the options market seemed extremely bearish on its face. In a bet that will only pay off if J.C. Penney shares fall below $3.00, over 1,000 of the January 2015 3-strike puts traded on Wednesday.

However, Brian Stutland of the Stutland Volatility Group said that this bet was probably not intended to pay off.

"This is probably a high-yield fixed-income protection play," Stutland said. "This person is likely buying the high-yield bonds, and hedging out their exposure by buying the puts."

That way, if the company goes bankrupt and is unable to pay off the bonds, then at least the trader will make money on those puts.

(Read More: The Demise of JC Penney)

So what does that say about where shares will go next?

"Somebody putting on this trade is probably not entirely excited about the company, nor wants day-to-day exposure to the stock," Stutland said.

But the very fact that the puts are selling for cheaply enough for this trade indicates that there is not a great sense that the company is going under.

"If people start to pay high premiums for the downside put — say, more than one percent of the value of the stock— that's when I'd start worrying about the company going bankrupt," Stutland said. In the meantime, "Buying the three-strike put and buying the bond is a pretty good idea."

Indeed, Kirk Ludtke, who covers the company for CRT Capital, does think the company still has some room to maneuver.

"J.C. Penney has a variety of financing options," Ludtke said, "and if they can maintain trade support, they should have quite a bit of financial flexibility." At the very least, this should allow them to stave off catastrophe.

But Stutland still wouldn't get involved. "Do they go bankrupt? Probably not. But I wouldn't touch the stock," Stutland said, adding: "There are about 2,000 stocks I want to own before J.C. Penney."

—By CNBC's Alex Rosenberg

—No disclosures

Symbol
Price
 
Change
%Change
JCP
---

Contact

  • Showtimes

    Fridays, 5:30p ET
    Saturday, 6a ET
    Sunday, 6a ET
  • Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

Latest Video

Options Action Daily Reports

Sponsored Related Links

More on thinkorswim by TD Ameritrade

  • Make sure you’re always keeping up with the market with up-to-the-minute news and breaking stories. Move on possible breakout stocks and options with potential opportunity. Plus, get in-depth analysis on futures and forex in one seamless, integrated experience. Join TD Ameritrade and trade commission-free for 60 days + get up to $600 cash.

You Make the Call

  • Mike Khouw, Options Action trader, shares his view on News Corp stock on the heels of testimony from Rupert Murdoch before British Parliament.

  • Do you have a question for the Options Action team? Options Action selects a viewer's question and gives the answer on the show's Make The Call Web Extra video.