J C Penney Options Strategies Going Into Analyst Day

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J C Penney Company Inc (NYSE:JCP) will hold its very first analyst day since 2012, and investors are anxiously waiting for updates from the department store chain. The event is scheduled for Oct. 8, and Goldman Sachs analysts believe it could drive high volatility in J C Penney shares, so they recommend buying straddles before then.

Volatility expected in J C Penney stock

In a report dated Sept. 11, 2014, analysts John Marshall, Stephen Grambling and Katherine Fogertey note that on J C Penney’s last analyst day in January 2012, the stock surged by 19%. But then it slumped by 20% in the three months after that. The previous analyst day was held in April 2010, and shares fell 3% on the day and 17% in the month afterward.

The Goldman Sachs team also notes that the department store chain is in the middle of a transition and right in an important seasonal period for the retail industry. The company’s stock has traded between $5 and $29 in the last two years. In just the last mouth, shares have climbed by 17%.

The timing of the analyst day

The analysts say though that as we approach the holiday season, investor sentiment tends to swing widely both ways. They also note that the retail chain’s board of directors has been looking for a permanent CEO for the last year.

The Goldman Sachs analysts further note that the event is two months into the quarter. Management had said they will update back to school shopping trends, as well as free cash flow and future comparable sales. Their tone and commentary could provide investors with some idea about whether J.C. Penney will meet expectations.

Buying J C Penney straddles

In their report, the Goldman Sachs team suggested that investors buy the Oct. 18 11% straddles for $1.25. They say the retail chain’s at-the-money one-month implied volatility of 43% is close to a two-year low and only slightly higher than the one-month implied volatility of 42%.

The analysts say current options markets look to be more focused on the November earnings reports and missing the possibility of volatility on Oct. 8. They prefer Oct. 18 options rather than Oct. 10 options though because of “liquidity reasons.” Also they say the stock will have time to react following J C Penney Company Inc (NYSE:JCP)’s analyst day. They note that straddle buyers do risk losing the premium they paid, however.

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