Dean Foods Co. (NYSE: DF) stock is falling this morning after the company posted an adjusted fourth-quarter profit of 27 cents per share, below analysts' expectations of 30 cents per share. Although DF reported an increase in sales, the company's profit suffered from rising commodity costs and lower gross profit margins. 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 DF.
After hitting a one-year high of $50.50 in March, the stock hit a one-year low of $24.11 in September. This morning, DF opened at $24.37. So far today the stock has hit a low of $24.23 and a high of $26.08. As of 10:55, DF is trading at $24.82, down $2.11 (-7.8%). The chart for DF looks bullish 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 June bear-call credit spread above the $30 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. For this particular trade, we will make a 6.4% return in four months as long as DF is below $30 at June expiration. Dean Foods would have to rise by more than 20% before we would start to lose money.
DF hasn't been above $30 since July and has shown resistance around $29 recently. This trade could be risky if the US economy turns around, but even if that happens, this position could be protected by resistance DF might find at its 200 day moving average, which is currently around $28 and falling.
Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in DF.
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