Some Traders Think JC Penney Is In The Perfect Position For A Short Squeeze

The chatter from some traders on Wall Street is that JC Penney stock is in a beautiful position for a short squeeze, in which investors shorting the stock are forced to cut their losses and exit their trades.

Maybe you're optimistic about JC Penney's future - maybe you're not. Regardless, the retailer's offering of 84 million shares at $9.65 could be seen as an opportunity for the three largest shareholders of the stock, hedge funds Glenview Capital, Soros Fund Management and Perry Capital, to buy up more stock to shore up their investment.

In doing so they would be buying JC Penney time to get its business together - to show some growth during the holiday season and get its stores fully restocked with merchandise its customers like.

Here's how traders are thinking about the squeeze - its not that crazy if you follow the logic:

So far the stock today has been steadily below the price offered, but it hasn't plummeted more than 15% (like it did earlier this week). To some traders, like Risk Reversal's Dan Nathan, that suggests that Goldman Sachs, the bank underwriting the share offering, is allowing those holding the stocks with weaker stomachs to get out of the way.

J.C. Penney stock is no longer for the faint of heart.

"Usually with a deal like this the underwriter has an over-allotment where they can stabilize the deal," said Nathan. "Goldman Sachs chose not to, and let the weak hands sell. Then once they're out of the way, Goldman can turn around and buy. Then the stock should go up to the deal price.... Shorts should be covering on a day like today."

The way some traders see it, once the stock starts creeping back up to the share offer price of $9.65, the short sellers will start to feel the squeeze.

That's when big hedge funds with an interest in the company can push the stock up until it's really uncomfortable for short sellers, clearing out the sellers and leaving only buyers.

"It could be a coiled spring on the slightest bit of good news," said Nathan.

On the other hand...

But there are plenty of short sellers that are holding fast. Nathan also pointed out that 38% of floats on J.C. Penney stock are short, and in the options market, J.C. Penney puts have become quite popular.

So it could be that the sellers here aren't going to quit, the stock is sinking like a stone, and there's nothing three of the biggest, baddest hedge fund managers in the world can do about it.