EOT Trade Alert – August 20, 2008

| August 20, 2008

August 20, 2008

Trade Alert:

    Buy JCP January 2009 $30 PUTS at $2.35 or better (JCPMF)

Company Background:

J.C. Penney (JCP) is an operator of department stores.  The company was founded in 1902 and currently runs more than 1,000 department stores.  JC Penney also operates four internet & catalog fulfillment centers.  They sell family apparel, jewelry, shoes, accessories, and home furnishings.

Short-Term Catalyst:

Over the last 20 days we’ve seen JCP stock rise by more than 30%.  The stock was trading in early August around $30 and jumped to $40 going into their most recent earnings announcement.

Unfortunately that earnings announcement was a bust.

The management team said to expect third quarter sales to decrease.  They also gave guidance that earnings for the quarter would be lower than analysts were expecting. Not good news.

Here’s what’s happening.  The government stimulus checks (sent out earlier in the year) proved to be a great revenue generator for the retail stores.  It artificially inflated their last quarter revenue numbers.  The other big event was the fall in oil prices.  It seems to have gotten lost that we’re still in an oil crisis.  Gas prices are up more than double from a few years ago . . . and consumers have less money to spend.

Consumer confidence numbers are at lows not seen since the last recession.

Add to those worries the increasing unemployment rates.  Now you have a good reason why the consumer’s holding tight to their wallet.

I don’t see consumer spending rebounding quickly.  I think the entire retail industry is going to sell-off in the next few weeks.  Investors are going to realize that spending isn’t rebounding as quickly as anticipated.  Then worries over the upcoming Christmas sales season will start to set in.

We’ll buy put positions on JCP to profit from the anticipated fall over the next few weeks.

On a technical basis, the stock is continuing to trend lower.  You can see from the chart its meeting resistance at the 200 day moving average.  The stock’s traded below the 200 day for more than a year now.  In addition the 50 day moving average is still in a downtrend.

Trade Details:

Option Ticker Symbol: JCPMF
Underlying Stock Symbol: JCP
Current Bid-Ask Price: $2.00 – $2.10
Option “Buy Up To” Price: $2.35
Break-Even On Stock At Expiration: $27.65
Maximum Risk Per Contract: $235

Exit Strategy:

JCP is trading at $37.58 a share.  Remember we want the stock to fall in value. Support levels will be at $35 and again at $30.  If the stock moves higher it will reach resistance around $45 and again at $48.



Category: EOT Trade Alert

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