Short sellers and options traders are poised to potentially generate sharp returns if volatility spikes when J.C. Penney Company Inc. (JCP), Macy's Inc. (M) and Nordstrom, Inc. (JWN) report earnings today and tomorrow, according to The Wall Street Journal. Speculators are betting that J.C. Penney's shares will experience a 13.4% single-session move after the company reports results Friday, compared to the 8.5% average change that the company's shares have undergone following the last eight quarterly earnings calls, Trade Alert figures show. (For more, see also: The 4 R's Of Investing In Retail.)

Retail Short Wagers

Traders have also stepped up their short bets on the SPDR S&P Retail exchange-traded fund (ETF) (XRT), with additional Trade Alert data revealing that since the start of April, put options on the ETF, which represent bearish wagers, have surged 25%, The Journal reported. In addition, call options, which represent bullish bets, have dropped 26% in that time. 

Retail's Continued Challenges

Market participants have been making these bearish bets at a time when U.S. retailers have been shutting their stores left and right, according to CNNMoney. Brick-and-mortar locations have been shutting down as online retailers like Amazon.com, Inc. (AMZN) thrive. While more than 6,000 of these stores closed their doors in 2008, Credit Suisse Group AG (CS) predicted that this year could be even worse, resulting in the closure of more than 8,000 locations. 

Widespread Speculation

As markets prepare for earnings, which Goldman Sachs Group Inc. (GS) states have become even more important to stock prices, some investors are hoping that retail shares will push even lower, The Journal reported. Even though J.C. Penney's stock "is sitting near long-term lows," "some traders are shopping for another drop," wrote David Russell, senior manager for E*Trade Financial Corp. (ETFC), in a note on the options trading ahead of the Penney's report. However, other investors have been taking a different tack, hedging their exposure or looking for a recovery of sorts, said Russell. (For more, see also: Top Retail Stock Picks Right Now: Credit Suisse.)

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