Option Trading Idea for Jo-Ann Stores (JAS)

09/01/2010 12:01 am EST


Not too many earnings reports coming up this week, so let’s look in the rearview mirror for today’s trade. We don’t have to look back too far, though. Jo-Ann Stores Inc. (JAS) reported after the close on Wednesday (August 25), coming in with a solid, if not a blowout, earnings report. What’s more, the company raised its full-year outlook.

The shares responded, as one would expect, soaring nearly 12% on Thursday. But the stock has weakened since that surge, including a small drop on Friday, while the broader market gained ground.

Part of the problem may be the 100-day moving average, which cut the rally off at the knees and kept a lid on the shares for the past two days.

Figure 1

Unwinding optimism could keep the shares in check as well. The put/call ratio is trolling near an annual low, and all six covering analysts rate JAS at least a “buy” (five rate it a “strong buy”). Not much room for more optimism among these folks, which could lead to some short-term weakness.

JAS options are not heavily traded, so bid-ask spreads are a bit wider than we’d like. As such, play the deep-in-the-money JAS September 45 put, which is nearly 90% intrinsic value.

You probably won’t get a double on this trade, but a drop to chart congestion in the $39-$40 area could yield a solid 50%-75% gain in the options.

By Chris Johnson and Jon Lewis, editors, The Winning Edge
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