Garmin Ltd. (NASDAQ: GRMN) stock is sinking today as the company is reviewing its options regarding the acquisition of Dutch mapmaker Tele Atlas, according to a spokesman for Garmin. Garmin's main competitor TomTom NV (TOM2) raised its proposed offer for Tele Atlas to €30 a share earlier today, significantly trumping Garmin's previous offer of €24.50 per share. It is reasonable now to expect Garmin to come back with a higher offer, which is why the stock is down today. 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 GRMN.GRMN hit a one-year high of $125.68 in October and has been rising almost all year, with its one-year low of 45.75 last November. This morning, GRMN opened at $96.14. So far today the stock has hit a low of $93.49 and a high of $96.68. As of 11:00, GRMN is trading at $93.15, down $7.41 (-7.3%). The chart for GRMN looks bearish and steady, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.
For a bearish hedged play on this stock, I would consider a December bear-call credit spread above the $130 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 5.3% return in 7 weeks as long as GRMN is below $130 at December expiration. Garmin would have to rise by more than 38% before we would start to lose money.
GRMN hasn't been above $126 ever and has shown resistance around $124 recently. This trade could be risky if the holiday season turns out to be a big year for GPS navigation, but even if that happens, this position could be protected by strong resistance GRMN has found around $120, where the stock topped over the past two months. Also, lower consumer spending in the wake of the housing and credit issues could mean fewer holiday sales this year.
Brent Archer is an options analyst and writer at Investors Observer. DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in GRMN.
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