Use Options to Trade the J.C. Penny Breakdown (JCP)

J.C. Penny JCP hasn't had the best run when it comes to retail stocks. Bill Ackman made the news today by selling his 18% stake in J.C. Penny claiming failure in the investment.

When fundamental meets technical analysis

Without diving deep into the numbers it is clear that J.C. Penny is in trouble. Their marketing plans have generally failed and they are losing the image they once maintained. In J.C. Penny's last earning call they reported a wider second-quarter loss as comparable sales fell 12%. J.C. Penny does have some cash on hand so we will have to see if they can turn their business around.

Technically speaking, J.C. Penny has been on the decline for some time. It has been on a steady cascade lower since it made highs February 2012. Once J.C. Penny fell below the 200 day moving average it has formed and executed 4 large bear flags, and it currently is in one now. With another large investor out of the way and a pattern break down on the charts, this looks like a good time to get short J.C. Penny.

With volatility elevated, due to the recent sell off, we want to run a ratio spread. This will allow us to run the trade for a small credit and we can take advantage of a move lower. Our first target on this bear flag breakdown is $12.40 which marks the bottom of the flag. Our ratio spread involves buying the 13 strike put and selling 2 of the 12.5 strike put.

Our breakeven for this trade is 11.80, so if JCP falls below that level we must close out or adjust our position. The sweet spot for us is at 12.50 where we will earn max profit which also lines up with our target. If we are wrong in our assessment and JCP begins to climb then we will collect the credit on the trade.

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