JC Penney Gets Pinched and the Pain Could Just Be Starting

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On Thursday, J.C. Penney reported what some are calling "the worst quarter in the history of retail."

The company reported a quarterly loss of $2.51 per share, and revenue dropped by 24.8 percent. Revenue at stores open for at least a year fell 31.7 percent, and customer traffic dropped by 17 percent last quarter following a 10 percent decrease in the third quarter.

(Read More: JC Penney Posts a Huge Loss; Shares Tumble)

Not surprisingly, these dismal numbers spurred option traders to make some large bearish bets on the stock. The biggest was the purchase of 30,000 May 16-strike puts for $1.57, which was done with the stock at $17.50. This trade will be profitable if JCP is below $14.43, or 17.5 percent lower, by May expiration.

One of the biggest concerns investors should have in J.C. Penney's cash supply. In November, they told investors that they would end the year with $1 billion in cash, but actually ended up with only $930 million. On Wednesday, they told investors that they had delayed $85 million in payments to their suppliers until the early part of the first quarter. This is another red flag that could signal that the company is running out of cash.

This caught the attention of ratings agencies Standard & Poor's and Fitch, who both lowered their credit ratings on the company—which, by the way, were already at junk status. And analysts at Morgan Stanley said yesterday that they expect Penney to run out of cash in the third quarter. Running out of cash means that JCP will be out of options for further changes to strategy, and may not even be able to pays its loans or suppliers.

(Read More: Cramer: JC Penney 'Is in a True Tailspin')

If this scenario begins to materialize, JCP shares are likely to make a break towards the $14 handle, which will make this trade very profitable. There are a lot of eyes on Wall Street watching this stock, and some of the trading in it can be emotionally driven, as traders react to the day-to-day news flow.

Therefore, to trade this name right now, you need to have a favorable risk/reward and at least a two month time frame, so that a trade thesis has time to play out and to emerge from the stock price noise.

Disclosures: None to report.

Brian Stutland is Managing Member of Stutland Equities and a contributor to CNBC's "Options Action."