KBR, Inc. (NYSE: KBR) announced earnings this morning that it beat expectations by about 10% and boosted by the company's work in Iraq. Shares, however, are plunging after the company's CEO acknowledged the company is likely to do less work in Iraq in the coming quarters as troop levels decrease. Also contributing to the plunge is the fact that over a quarter of the company's profit was from a one-time gain, while analysts' estimates do not generally reflect such gains. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on KBR.After rising steadily for much of the year to hit a one-year high of $45.24 in early October, this morning, KBR opened at $41.98. So far today the stock has hit a low of $36.94 and a high of $42.00. As of 10:55, KBR is trading at $40.58, down $2.32 (-5.4%). The chart for KBR looks bullish and steady.
For a bearish hedged play on this stock, I would consider a November bear-call credit spread above the $45 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. This particular trade will make a 6.3% return in twoo weeks as long as KBR is below $45 at November expiration. KBR would have to rise by more than 11% before we would start to lose money.
KBR has never been above $45 by more than a few cents and has shown resistance around $43 recently. This trade could be risky if stock's downward inclination today is merely being fueled by the negative outlook in the market, but even if that is true, this position could be protected by resistance formed when KBR topped out around $45 in October.
Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: At publication time, Brent neither owns nor controls positions in KBR.
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