CROCS Inc. (NASADQ: CROX) is declining this morning after an analyst at JPMorgan downgraded the stock to "Neutral" from "Overweight," adding that a slumping economy is reducing demand. Personally, it looks like we might be seeing the beginning of the end to this fashion fad. 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 CROX.
After hitting a one-year high of $75.21 in October, the stock hit a one-year low of $16.14 in March. This morning, CROX opened at $16.37. So far today the stock has hit a low of $15.70 and a high of $16.39. As of 10:45, CROX is trading at $15.89, down $1.44 (-8.3%). The chart for CROX looks bearish and steady.
For a bearish hedged play on this stock, I would consider a May bear-call credit spread above the $21 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 9.6% return in 7 weeks as long as CROX is below $21 at May expiration. Crocs would have to rise by more than 32% before we would start to lose money. Learn more about this type of trade here.
CROX hasn't been above $21 since February and has shown resistance around $18 recently. This trade could be risky if the company's earnings (due out in in late April or early May) are a positive surprise, but even if that happens, this position could be protected by resistance CROX might find around $20.
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 CROX.
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Reader Comments (Page 1 of 1)
4-04-2008 @ 8:40PM
samurai_stockholder said...
I think your hedge play is a very poor strategy.
JPM's downgrade is highly suspect and is not based on any new information; merely assumptions based on dated information.
CROX's overseas markets are on fire now and the company is now entering its best selling season.
I live in Japan and even though the temperatures are quite cold, I see more and more people wearing them and certainly see that distribution is quickly expanding in Japan.
CROX's '08 EPS guidance is $2.70/share. I believe they've learned from experience that it is better to under-promise and over deliver and that actual '08 EPS will be closer to $3.00/share; primarily due to rapidly expanding export markets.
Also, there are 30,000,000 sales short on CROX (almost 50% of float and a large portion being naked shorts as CROX is currently on the SHO List) so there should be massive covering prior to the Q1 earnings announcement (around 14 May).
The inventory issue is being blown way out of proportion. The primary reason for the inventory build up is to service expanding overseas demand and is not because of falling U.S. sales.
Over the last couple of days (April 3-4), there has been massive short covering and buying activity on way above average volume proving a strong bottom has been reached and that a bull run and possible short squeeze is imminent.
CROX is a strong buy at these levels.
4-11-2008 @ 12:28PM
Tinkerbell said...
Wishful thinking Samurai... Weakening sales are already here in the U.S., and they've basically admitted to that.