Black & Decker Corp. (NYSE: BDK) posted this morning a fourth-quarter profit, excluding items, of $67.4 million, or $1.06 a share, ahead of analyst estimates of $1.03 per share. BDK shares are trading lower today, however, as the company also projected lower earnings for 2008, saying it doesn't expect a housing recovery in 2008. BDK now expects earnings of $1.10 to $1.20 per share for the first quarter, while analysts were expecting $1.40 per share. 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 BDK.After hitting a one-year high of $97.01 in July, the stock hit a one-year low of $63.35 earlier this month. This morning, BDK opened at $65.65. So far today the stock has hit a low of $65.65 and a high of $68.54. As of 10:15, BDK is trading at $67.80, down $2.18 (-3.1%). The chart for BDK looks bearish but improving slightly, 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 $75 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 11.1% return in 2 months as long as BDK is below $75 at February expiration. Black & Decker would have to rise by more than 10% before we would start to lose money.
BDK hasn't been above $75 since December and has shown resistance around $72 recently. This trade could be risky if the Fed makes another big cut this week and home improvement stocks shoot upwards, but even if that happens, this position could be protected by resistance BDK might find at its 50 day moving average, which is currently around $75 and falling.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in BDK.
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