The rest of my order filled.

music selection:  “Lonely Ol’ Night” — John Mellencamp

On 15NOV2019, I was able to close a position in the JC Penny bond (CUSIP: 708130AD1) for a 66.31% annualized return by selling at 97.  I immediately opened a good till canceled order to get back in the trade if the bond fell to 93 or lower.

On 21NOV2019, I got a fill for 1 bond at 92.9120.  I left the other 7 bonds on the order open and I got a fill at 93 on 02DEC2019.  I have a full allocation to this bond and a 20%+ yield to maturity.  I’ll be looking to close early if I can earn 30% or more by doing so but expect that I will hold to close to maturity with this bond maturing soon on 01JUN2020.

Ravenous lizards playing the home game can look to buy the bond up to 93.  I may move that guidance up as the maturity gets closer.  There is some easy money to be made here and it is a mortal lock that JCP can pay this bond in full as it has a enough room on its credit revolver to cover the outstanding amount at par.

Devour your prey raptors!

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Update JC Penny Bond

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5 thoughts on “Update JC Penny Bond

  • December 8, 2019 at 8:44 pm
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    So does the market think there’s a 20% chance of bankruptcy?

    The Jan 15, 2010 put at a $1 strike is about 0.37. I guess that works out to probably 0.20 in time value between now and bond maturity.

    Reply
    • December 8, 2019 at 9:28 pm
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      The TV on the options probably has more to do with the possibility of the calls being worth that on any good news. The puts will follow the calls according to put/call parity, less the cost to borrow shares. Else, risk free profit opportunity exists for the big quant/bot trading firms.

      Reply
      • December 9, 2019 at 3:44 am
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        I was thinking about how much it would cost to hedge the bond with puts. Suppose $9300 worth of bonds could drop in value to $3300 in the event of a sudden accounting scandal / bankruptcy meltdown, and suppose the stock price would be at $0.05 if that happened (I know, SHLDQ held out in to 20-30 cent range for a strange amount of time, but let’s be optimistic). To hedge that $6k in risk, you’d need 6000/(95-37) = ~103 of those $1 Jan 2021 puts.

        The cost of those 103 puts would be $3811 which seems a high price to pay when the YTM in dollar terms is $1265, but according to my ThinkorSwim calculator, that option would drop from $37 per contract to about $26 by 6/20/20 if vol, price, etc. are equal at that time. So the options would depreciate 103*(37-26)= $1133 in that scenario for a net position profit of 1265-1133=132, which after investing 9300+3811=13,111 is only a treasury-level return, 2% annualized. 🙁

        Of course, if JCP rallied to $2, and presumably did not default, that option would be worth about $11, and you’d be out a net 1265-2678=-1413, a -10.77% non-annualized return. If JCP rallied so hard the puts were unsellable, and a complete loss, your worst case non-default scenario is 1265-3811= -2546, or -19.4% non-annualized.

        However, if JCP went to 0.50 and did not default, the puts would be worth about $52 and your total ROI would be almost 16% non-annualized. If JCP dropped to 0.20, but did not default, the puts would be worth about $82 and your total ROI would hit 1265+2065= 3330, or 25.4% non-annualized.

        Not terrible odds at all, I think. I was considering this hedged trade based on the yield-curve inversion, the overall 6% reduction in Black Friday crowds, and JCP’s reports of weak sales. A springtime liquidity freeze would be a lot easier to deal with if one were holding the puts.

        Also, did you notice that 708160BS4 is puttable? I couldn’t find the option date on that, but I presume those $300+M are due to be refinanced prior to that date.

        Reply
        • December 9, 2019 at 2:18 pm
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          It is an interesting idea but not the intent of these bond trades. Bonds are very different from equity in that the payoff scenario is binary. They either pay par at maturity or go into default. JCP is essentially certain to survive long enough to pay off my bond. The put is moot. I prefer to reduce my risk in bonds by diversifying into multiple issues.

          Reply
  • March 17, 2020 at 4:34 pm
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    Still holding or adding to your JCP bond? Sounds like from their conference call that this bond is minor and can be paid out of current assets.

    Reply

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