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Sotheby's (NYSE: BID) reported operating revenues of $85.1 million for the third quarter on Friday, a 48% increase from the prior period. Operating losses fell to $20.9 million, a 31% improvement. The Q3 gains were primarily the result of higher auction commission revenues and private sales commissions. However, the stock fell on Friday due to worries about recent losses on underperforming auctions. Today, the stock is rebounding strongly as investors had time to digest the overall rosy picture printed in the earnings release. 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 BID.After hitting a one-year high of $61.40 in October, the stock has fallen considerably this month. BID opened this morning at $34.25. So far today the stock has hit a low of $33.76 and a high of $34.81. As of 11:10, BID is trading at $34.68, up $1.93 (5.9%). The chart for BID looks neutral and deteriorating.
For a bullish hedged play on this stock, I would consider a January bull-put credit spread below the $22.50 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. This particular trade will make an 8.7% return in just 2 months as long as BID is above $22.50 at January expiration. Sotheby's would have to fall by more than 34% before we would start to lose money.
BID hasn't been below $22.50 at all in the past year and has shown support around $32 recently. This trade could be risky if the company's recent slide continues, but even if that happens, this position could be protected by strong support formed in late 2006 around $30, plus it is coming to a price where bargain hunters may find it attractive.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in BID.
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