By Doris Frankel
(Reuters) - Activist hedge fund investor William Ackman may be off the board of J.C. Penney Co Inc
With Ackman stepping down from Penney's board on Tuesday after a public spat with fellow board members, the focus is shifting to the company's quarterly earnings due on August 20.
The options market suggests a move of at least 16 percent in the shares in either direction after the results are released.
"J.C. Penney is heading into earnings next week with questions about the sustainability of the business," said Steve Place, a founder of options analytics firm investingwithoptions in Austin, Texas.
Concerns about Penney's struggles have boosted bearish positions in its shares to a new peak. As of Thursday morning, total put open interest stood at a record 845,000 contracts, more than double the 400,000 contracts since July 23, according to Trade Alert, an options analytics firm.
A buyer of put options has the right to sell the shares by a given date at a specific price; these contracts are often used to express a bearish outlook on a stock, or as a hedge against losses.
By comparison, call open positions increased to a total of 568,000 contracts, though that is below levels seen in May. Much of Thursday's call open interest growth is in far-dated contracts that expire in January 2015, Trade Alert said.
A total of 1.44 million options changed hands in Penney over the two weeks beginning August 1, with 65 percent of the volume in puts, Trade Alert President Henry Schwartz said.
The public battle between Penney and Ackman escalated late last week with the hedge fund manager demanding the ouster of the retailer's chairman Thomas Engibous as well as the interim Chief Executive Myron Ullman.
Sentiment on Penney shifted somewhat on Wednesday when shares rose and call volume spiked in late trading. The stock gained 3.4 percent on Wednesday after the New York Post reported that same-store sales growth was positive so far in August, citing sources. The stock advanced on Thursday after hedge fund manager George Soros said he raised his stake in the company.
Shares were up 3.9 percent to $13.62 near midday on Thursday, but so far this year, the stock has lost 31 percent.
"Right now if you look at the stock, the price action has been poor and there seems to be a lot of people betting on a continuation of this downtrend," said Joe Bell, senior equity analyst at Schaeffer's Investment Research.
That can also be seen in the large amount of short interest in the stock, a gauge of investor skepticism. Investors who sell securities "short" are betting that stocks will fall.
According to Markit, a financial information services company, short interest on J.C. Penney has risen from a low of about 10 percent in mid-May to its current level of 17.8 percent. The demand to borrow the shares remains high, with almost two-thirds of the available supply from lending programs out on loan, Markit said.
"If there are any positive headlines on J.C. Penney, a lot of these bearish speculators may rush to cover their short positions," Bell said.
Interest in longer-term downside puts has also been notable this month, a sign that investors are worried about the company's future prospects.
"Options traders are clearly bearish in their long-term estimations of where J.C. Penney stock will be by the early part the new year," said Gareth Feighery, a founder of options education firm marketTamer.com in Philadelphia.
COST OF PROTECTION
Heading into earnings, implied volatility, a statistical measure of perceived risk of future stock movement, is elevated, causing option prices to be more expensive.
Implied volatility for the next 30 days for Penney options stood at 90.67 percent on Wednesday, near a two-year high, according to options analytics firm Livevol in San Francisco.
"J.C. Penney faces near decade-low stock prices and near multi-year highs in volatility as option traders price in more risk for the shares, which includes the possibility of lower lows in the stock price," said Ophir Gottlieb, Livevol managing director.
As of Thursday, the options market is pricing in a potential move for shares of approximately 16.5 percent on earnings. Over the past eight quarters, the stock has moved about 7 percent post-earnings, according to Birinyi Associates. The implied move is based on the weekly $13.50 straddle expiring on August 23.
A long straddle combines the purchase of a call and put option at the same strike price and expiration and is a bet on volatility.
A 16 percent move is not unprecedented. In late February, shares fell as much as 22 percent after JC Penney reported a 32 percent decline in comparable sales.
(Reporting by Doris Frankel; Editing by Leslie Gevirtz)