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Office Depot, Inc. (NYSE: ODP) stock is falling this morning on news that it does not expect fourth quarter sales to match sales from the third quarter. Q3 results reported today were solid, as the company posted 43 cents EPS against expectations of 40 cents, but the company's outlook for the holiday dragged down shares and in this morning's conference call, ODP warned that 2008 first quarter sales could also drop off. 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 ODP.After hitting a one-year high of $42.03 last November, the stock hit a one-year low of $16.51 in October. This morning, ODP opened at $18.08. So far today the stock has hit a low of $17.82 and a high of $18.71. As of 10:55, ODP is trading at $18.25, down 55 cents(-2.9%). The chart for ODP looks neutral but improving, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bearish hedged play on this stock, I would consider a January bear-call credit spread above the $22.50 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 an 8.7% return in 9 weeks as long as ODP is below $22.50 at January expiration. Office Depot would have to rise by more than 23% before we would start to lose money.
ODP hasn't been above $22.50 since August, and has shown resistance around $20 recently. This trade could be risky if the stock finds support around $18 and moves higher if the economy becomes reinvigorated, but even if that happens, this position could be protected by the resistance ODP formed around $22.50 when it topped out in October.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in ODP.
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