Jones Apparel Group Inc. (NYSE: JNY) shares are rising today after the company's Q3 earnings release. Earnings skyrocketed to $3.97 per share, up from $0.56 in the year-ago period, thanks to a hefty income tax benefit and other one-time gains. Revenues fell 5% but still exceeded analysts' expectations. Excluding one-time items, the company's adjusted EPS was $0.51, ahead of analysts' expectations of $0.34. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on JNY.
After hitting a one-year high of $35.54 in January, the stock fell to a 52-week low of $16.73 in August. JNY opened this morning at $22.94. So far today the stock has hit a low of $19.70 and a high of $23.08. As of 10:35, JNY is trading at $20.07, up $0.37 (1.9%). The chart for JNY looks bullish and steady, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bullish hedged play on this stock, I would consider a January bull-put credit spread below the $17.50 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in just 3 months as long as JNY is above $17.50 at January expiration. Jones would have to fall by more than 13% before we would start to lose money.
JNY hasn't been below $17.50 by more than a few cents in the past year and has shown support around $18.50 recently. This trade could be risky if the weakening economy puts a damper on consumer spending through the holiday season, but even if that happens, this position could be protected by strong support it has found around $17, where the stock has bottomed twice in the past 3 months.
Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: At publication time, Brent neither owns nor controls positions in JNY.
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