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Morning Update


This morning S&P 500 futures are pointing to a lower open as the Chinese September PMI was reported at 47.8, a level which points to economic weakness. The European composite PMI was also released overnight and was lower than expected at 45.9. This sent the Shanghai Composite down over 2% and has the Euro backing off recent highs into the sub 1.30 range. In the US initial jobless claims came in at 382K, which was worse than the consensus expectation for claims of 373K.

Yesterday’s unusual options activity focused on clothing retailers: we saw a trader buy a 2x1 put ratio spread trade 24,922 times in JCP and another roll a short at the money put position in TJX from September to October 25,218 times. JC Penny is a US retailer currently going through a major restructuring to target higher end shoppers, while TJX is a off-apparel retailer that owns TJ Maxx and Marshals. The sentiment expressed in these trades favors bearish macro view in which shoppers will favor discount, value oriented stores over higher-end luxury goods.

The JCP trade is a bearish put ratio spread. The trader bought 24,900 Nov. 27 puts for 1.68 and sold twice as many Nov. 22 puts for $0.43 in order to finance the trade. The resulting spread makes money if JCP is between 17 and 27 at November expiration, with the maximum profit occurring if JCP closes at 22. If JCP rallies from here the trade will only loose the premium paid, which is $0.82.

In contract to the bearishness expressed in the JCP trade, we saw a trader roll a short put position from September to October in TJX. The trader bought 25,218 Sept. 45 puts for $0.37 and sold 25,218 Oct. 45 puts for $1.10. This trade was executed for net credit of $0.73 and results in the trader being short an at the money put, which is bullish position. This trade will profit if TJX is above $43.90 at October expiration. Selling a put is a strategy traders employ when they would like to get long a stock at a specific price (in this case 43.90) and want to generate some income while waiting to buy on a pullback.

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