J.C. Penney Co., Inc. (JCP) - Shares of the third-largest department store chain in the U.S. surged 7.1% today to secure an intraday high of $33.88 on news Pershing Square Capital Management LP, a New York hedge-fund firm run by William Ackman, disclosed a 16.5% stake in the retailer. JCP’s shares rallied yesterday as well after the department store operator said same-store sales increased 5.1% last month. Investors made a beeline for JCP options right out of the gate this morning. Optimistic traders looking for shares to climb higher ahead of January 2011 expiration initiated three-legged bullish spreads. Investors purchased roughly 4,000 in-the-money calls at the January 2011 $30 strike for an average premium of $5.29 each, sold about the same number of calls at the higher January 2011 $40 strike for a premium of $0.96 apiece, and sold 4,000 puts at the January 2011 $28 strike at an average premium of $1.31 a-pop. The net cost of the three-legged transaction amounts to an average of $3.02 per contract. Thus, bullish players employing this strategy make money if the retailer’s shares exceed the average breakeven price of $33.02 through expiration day next year. Maximum potential profits of $6.98 per contract are available to these traders should the price of the underlying stock jump 18.05% over today’s high of $33.88 to trade above $40.00 by January expiration. Finally, a number of investors purchased put spreads in the November contract, perhaps to lock in the rally in the retailer’s shares. One such put player appears to have purchased a 2,500-lot November $33/$30 put spread at an average premium of $1.30 per contract. The transaction yields downside protection beneath a breakeven share price of $31.70 through November expiration. Options traders exchanged approximately 84,000 contracts on JCP by 12:12 pm ET.
Tyson Foods, Inc. (TSN) – Shares of the meat maker fell 7.80% to $15.00 by 12:25 pm in New York trading after the U.S. Department of Agriculture cut its corn crop estimate. The food products company uses corn to feed its animals. One bearish trader rushed to the January 2011 contract within the first 5 minutes of the session in order to scoop up put options on the meat manufacturer. The trader purchased 10,000 puts outright at the January 2011 $15 strike for an average premium of $1.00 each when Tyson’s shares were trading around $15.69. The erosion in the price of the underlying shares and increase in options implied volatility on the stock since the put transaction lifted the asking price on those put options 66.7% to $1.25 each as of 12:30 pm ET. The put player is poised to profit should Tyson’s shares fall another 6.7% to breach the effective breakeven price of $14.00 by expiration day next year. TSN’s overall reading of options implied volatility is currently up 10.7% to stand at 37.85%.
Goldcorp, Inc. (GG) – The price of gold rallied and the dollar dipped lower after the U.S. Labor Department said non-farm payrolls declined by 95,000, far more than the expected decline of 5,000 jobs, in the month of September. Shares in Goldcorp, the world’s second-largest gold producer by market value, increased 1.80% in the first half of the trading session to touch an intraday high of $44.47. One gold bull purchased a call spread on the stock in order to prepare for shares to climb higher ahead of expiration in January 2011. The investor picked up 5,000 in-the-money calls at the January 2011 $42 strike for an average premium of $4.38 each, and sold the same number of calls at the higher January 2011 $45 strike at an average premium of $2.78 apiece. Net premium paid to initiate the transaction amounts to $1.60 per contract, thus positioning the trader to profit if shares exceed the average breakeven price of $43.60 through expiration. The call spreader stands ready to accumulate maximum potential profits of $1.40 per contract in the event that, at expiration, Goldcorp’s shares are trading above $45.00.
CVS Caremark Corp. (CVS) – Shares of the largest U.S. provider of prescription drugs fell 3.10% to $30.99 in early afternoon trading. One pessimistic options trader was well positioned to benefit from the pullback today and opted to take profits off the table. It looks like the investor sold 5,000 calls at the October $32 strike at a premium of $0.53 apiece on Monday when shares of the underlying stock were trading at a volume-weighted average price of $31.60. Subsequent erosion in the value of shares dragged premium on the October $32 strike calls down significantly this week. It looks like the investor was able to buy back the puts at $0.18 per contract today to pocket net profits of $0.35 per contract. Closing out the short position today rather than allowing the contracts to expire worthless next week could be a sign he is taking what he can get today perhaps because he sees shares recovering ahead of expiration.