OPTIONS REPORT: Traders Shop For Bullish Options In JC Penney, Kohl's

Options trading was brisk across the retail sector Tuesday, as traders staked out bullish bets on J.C. Penney Co. (JCP) and Kohl's Corp. (KSS) ahead of a reading on last month's sales due out later this week.

On Thursday, nearly two-dozen of the largest U.S. retailers are expected to report an average sales increase of 3.4% for December, according to Thomson Reuters. That would be up from a 3.1% increase in December 2010.

Analysts expect some of December's thinnest sales gains to come at apparel-heavy retailers and department stores, which are expected to post same-store sales gains of 2.1% and 3.1%, respectively.

J.C. Penney is expected to report nearly flat December same-store sales, but the forecast failed to deter bullish options traders Tuesday. J.C. Penney's call options outpaced bearish puts options by four to one and were the heaviest since June, Trade Alert data showed.

Tuesday's most actively traded J.C. Penney options were calls that grant the right to buy the stock for $37 by the middle of February. Investors paid prices like $1.15 apiece for roughly 13,000 of the bullish calls, which can be swapped for stock at a profit should shares of J.C. Penney gain 8.9% over the next seven weeks.

Open interest in the $37 strike calls was just 681 contracts prior to Tuesday's session, indicating that nearly all of Tuesday's activity was the work of traders who established new positions. Shares of J.C. Penney fell 13 cents, or 0.4%, to close at $35.02.

Traders of J.C. Penney options appeared to see "indications of strong sales at the end of the year," ahead of this week's same-store sales report, said WhatsTrading.com options analyst Frederic Ruffy. "They likely expect some positive news ahead," he said.

Call options convey the right to buy shares for a set price by a fixed expiration, and buyers of call options tend to profit from stock gains. Put options convey the right to sell shares, and buyers tend to profit from stock declines.

Shares of J.C. Penney, based in Plano, Texas, have climbed 50% since falling to a 52-week low in January. Despite recent stock gains, J.C. Penney's options are nearly as cheap as they've been in a year, said Ralph Edwards, director of derivatives strategy at ITG Inc. J.C. Penney is scheduled to post fourth-quarter results late in February.

Similarly bullish options sentiment also appeared in Kohl's Tuesday, as call volume in the Wisconsin-based retailer was the heaviest since May 2011. Buyers scooped up January $50-stike calls, the largest batches of which cost 50 cents each. Those traders profit from a 5.1% stock rise over the next three weeks. Shares of Kohl's fell $1.32, or 2.7%, to close at $48.03.

February $50 calls also saw action Tuesday, with one bullish trader paying $1.28 for the largest batch of those calls. Kohl's is expected to report December same-store sales growth of 2.3%, according to analysts polled by Thomson Reuters. Kohl's is scheduled to report fourth-quarter earnings in late February.

Traders were not unanimous in their optimism in retail stocks Tuesday, however. One of Tuesday's largest single trades was made by a bearish trader targeting weakness in the SPDR S&P Retail ETF (XRT), which ended 2011 with its top holdings in grocery-store operators Winn Dixie Stores Inc. (WINN), Supervalu Inc. (SVU) and Ruddick Corp. (RDK).

Traders set up a put "spread" with options expiring in March. To do it, they sold March $47-strike put options to offset the cost of $52-strike March puts. More than 31,000 contract pairs changed hands for $1.43 apiece, meaning the investor committed $4.4 million to a trade that begins to profit should the XRT fall nearly 4% by the middle of March. The XRT fell 2 cents, or 0.4%, to close Tuesday at $52.53.

Winn-Dixie Stores, Inc. (MM) (NASDAQ:WINN)
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