J.C. Penney’s Selloff Friday Was an Overreaction — Use This Options Trade to … – TheStreet.com

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Retailer J.C. Penney (JCPGet Report) reported earnings Friday, and same-store sales were up 6.4%, while the bottom- and top-line numbers were better than expected. Even so, the stock plummeted 15% Friday as the broader markets were unsettled and slid lower. The following chart of J.C. Penny’s stock shows the big overreaction.

In spite of the good news in the quarterly results, the price gapped down strongly on Friday, and price moved far below support. At the same time, a volume spike confirmed the likely bullish reversal signals, and further confirmation came from the relative strength index, which moved well below the 30 index value into oversold territory. All of these signals predict an adjustment to the upside to come soon.

Given this, we looked at a very cheap stock option, the December 7 call, which provides investors with a way to profit from future gains in the stock’s price. This option has 32 days to go before expiration and it is 0.56 in the money. The price is 0.84, so only 0.28 of that price is nonintrinsic. This is a bargain price. Including trading costs, this call option costs $93 based on Friday’s closing price.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

Besides blogging at TheStreet.com, Michael Thomsett also blogs at the CBOE Options Hub and several other sites. He is author of 11 options books and has been trading options for 35 years.  Thomsett Publishing Website