J.C. Penney Company, Inc. (NYSE:JCP)’s stock price has started to recover from a sharp pullback earlier this month as analyst sentiment improves (until recently, investor sentiment has been incredibly low), and the volume in options trading has increased along with it, especially on the $8 strike price expiring May 16, the day after J.C. Penney is expected to file its 1Q14 earnings. Open interest at the $8 strike price is over 30,000 lots compared to 28,400 for $9 and 22,300 lots for the $10 strike price.

J.C. Penney

Analysts have become more optimistic about J.C. Penney

After months of disappointing same-store sales figures, Citi analyst Oliver Chen made the bull case for J.C. Penney Company, Inc. (NYSE:JCP) just as the price was about to dive, arguing that the retailer had already done the hard work of improving its mix of product lines and getting rid of less profitable (or loss making) categories to make more room for a revamped home department. The changes cost J.C. Penney valuable floor space on top of having to get rid of inventory with clearance markdowns and renovation costs, but all that is in the past, which is why Chen rates J.C. Penney a Buy and thinks that it will hit $11 in the next year (currently $8.05).

Call options show changing sentiment

The sudden interest in J.C. Penney Company, Inc. (NYSE:JCP) call options seems to confirm that investors expect some good news next month. It’s possible that people are selling the call options as a covered call strategy, but that would mean outperforming the stock if it loses value (but still losing money overall) and capping the upside at essentially nothing. That might be the explanation for the selling contracts with strike prices of $9 or $10, but it doesn’t make sense for a long investor to sell call options at the current stock price. If you’re so sure the price will go down, you’d rather just sell.

That leaves the other possibility – that people expect J.C. Penney Company, Inc. (NYSE:JCP)’s stock price to jump after 1Q14 earnings are announced, and they want to lock in the current price before it recovers too much. The premium for an $8 call option rose from 30-cents Monday morning to 46 cents, also suggesting that the demand is from people who want to buy call options now because they expect an earnings beat.