Allstate (ALL) slips on Loews (LTR) earnings

Posted Feb 11th 2008 12:51PM by Brent Archer
Filed under: Earnings Reports, Bad News, Industry, Allstate Corp (ALL), Options, Loews Corporation (L)

Allstate Corp. (NYSE: ALL) stock is declining this morning after competitor Loews Corp. (NYSE: LTR) reported a fourth-quarter profit, excluding investments, of 81 cents per share, 26 cents below analysts' forecast of $1.07 per share. LTR blamed the disappointing earnings on a 50 percent decline in profit at its CNA Financial Corp (CNA) insurance affiliate, which could be a bad sign for ALL. 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 ALL.

After hitting a one-year high of $63.73 in May, the stock has hit a new one-year low today. This morning, ALL opened at $46.56. So far today the stock has hit a low of $45.30 and a high of $46.60. As of 11:05, ALL is trading at $45.89, down 68 cents (-1.5%). The chart for ALL looks neutral and 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 an April bear-call credit spread above the $55 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 4.2% return in two months as long as ALL is below $55 at April expiration. Allstate would have to rise by more than 20% before we would start to lose money.

ALL hasn't been above $55 since October and has shown resistance around $53 recently. This trade could be risky if the economy turns around, but even if that happens, this position could be protected by resistance ALL might find between $50 and $55, where ALL has topped out over the past few months.

Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in ALL or LTR.

Tags: ALL, Allstate, earnings, inthenews, Loews, LTR, options