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Palm, Inc. (NASDAQ: PALM) stock is falling this morning after the company announced yesterday that it is expecting a net loss of 22 cents to 24 cents per share for the current quarter on sales of about $345 million to $350 million. The company had forecast sales of about $375 million. Analysts were looking for a 4 cent per share profit. PALM cited product delays for the slump in sales. 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 PALM.After hitting a one-year high of $19.50 in March, the stock hit a one-year low of $6.29 on Wednesday, but today it is even lower. This morning, PALM opened at $5.42. So far today the stock has hit a low of $5.33 and a high of $5.70. As of 10:55, PALM is trading at $5.50, down $1.09 (-16.4%). The chart for PALM looks bearish and steady, 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 February bear-call credit spread above the $7.50 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 10 weeks as long as PALM is below $7.50 at February expiration. Palm would have to rise by more than 36% before we would start to lose money.
PALM has been above $7.50 as recently as mid November, but has fallen sharply this morning and shown resistance around $6.80 over the past few weeks. This trade could be risky if the stock bounces back strongly, but with increasing energy prices and dropping home values, consumers may not have too much discretionary income to spend in an increasingly crowded electronics market.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in PALM.
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