Puts pay off as Penney plummets

Skepticism over J.C. Penney’s turnaround story has turned into profits for bearish traders.

On Monday, Investitute’s tracking systems showed that 12,000 Weekly $5 puts expiring this afternoon were purchased for $0.10 to $0.12 with shares at $5.52. These were clearly new positions, as open interest in the strike was only 483 contracts before the trades occurred.

Today those calls went for $0.52, a gain of about 300 percent in less than a week. The stock fell 18.1 percent in the same period, illustrating how far options can outperform their underlying shares.

Long puts lock in the price where a stock can be sold no matter how far it might drop, gaining value in a selloff with the potential for significant leverage. The contracts can be purchased either as an outright bearish bet or a hedge on a long-stock position.

JCP fell 13.99 percent to $4.55 today. The ailing department-store operator beat earnings estimates this morning but fell short in revenues and same-store sales.

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