Nortel Networks Corp. (NYSE: NT) stock is plummeting this morning after the company reported a fourth-quarter net loss of $844 million, or $1.70 per share. Adjusting for a onetime noncash expense of $1.06 billion related to a deferred Canadian tax asset, NT earned 34 cents per share, but that was still lower than Wall Street's expectation of 44 cents per share. NT executives blamed higher operating costs for the disappointing earnings 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 NT.
After hitting a one-year high of $30.27 last February, the stock hit a one-year low of $10.28 in January. This morning, NT opened at $10.28. So far today the stock has hit a low of $9.67 and a high of $10.28. As of 10:45, NT is trading at $9.76, down 1.69 (-14.8%). The chart for NT looks bearish and steady, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.
For a bearish hedged play on this stock, I would consider a June bear-call credit spread above the $12.50 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. For this particular trade, we will make an 11.1% return in four months as long as NT is below $12.50 at June expiration. Nortel would have to rise by more than 36% before we would start to lose money. Learn more about this type of trade here.
NT hasn't been above $12.50 by more than a few cents since early January and has shown resistance around $11.70 recently. This trade could be risky if the US economy rebounds quickly, but even if that happens, this position could be protected by resistance NT might find at its 50 day moving average, which is currently around $12.50 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 NT.
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Reader Comments (Page 1 of 1)
3-01-2008 @ 7:35PM
Rusty said...
It looks like NT's last problem is done. Noe lets go!!