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Garmin Ltd. (NASDAQ: GRMN) stock is falling after JP Morgan cut its 2008 U.S. GDP growth estimate, S&P 500 target and earnings for S&P 500 companies, after the firm's chief economist said he believes a recession began in January. Though GRMN is not a member of the S&P 500, this is a bad sign, as the index is a good indicator for the broader market and lower GDP probably means few people interested in buying Garmin's pricey offerings. 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 GRMN.After hitting a one-year low of $52.11 last March, the stock hit a one-year high of $125.68 in October. This morning, GRMN opened at $54.63. So far today the stock has hit a low of $53.31 and a high of $54.95. As of 12:25, GRMN is trading at $54.03, down $1.11 (-2.0%). The chart for GRMN looks bearish and steady, while S&P gives the stock a very positive 5 STARS (out of 5) strong buy rating.
For a bearish hedged play on this stock, I would consider an April bear-call credit spread above the $70 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 one and a half months as long as Garmin is below $70 at April expiration. GRMN would have to rise by more than 29% before we would start to lose money.
GRMN hasn't been above $70 by more than a few cents since early January and has shown resistance around $59 recently. This trade could be risky if the US economy turns around quickly, but even if that happens, this position could be protected by resistance GRMN might find around $70, where it has topped out twice in the past two months.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in GRMN.
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