Sherwin-Williams (NYSE: SHW) shares are falling after the company cut its second-quarter earnings estimate to between $1.40 and $1.50 per share, down from a range of $1.45 to $1.60 per share. SHW also cut its FY2008 forecast to a range of $3.60 to $4.10 per share, down from a range of $4.70 to $4.85 per share. 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 SHW.
After hitting a one-year high of $55.90 last April, the stock hit a one-year low of $33.54 in January. This morning, SHW opened at $51.73. So far today the stock has hit a low of $51.68 and a high of $54.80. As of 12:15, SHW is trading at $54.34, down $1.35 (-2.4%). The chart for SHW looks bullish and steady, while S&P gives the stock a bullish 4 Stars (out of 5) Buy rating.
For a bearish hedged play on this stock, I would consider a July bear-call credit spread above the $60 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 12.4% return in seven weeks as long as SHW is below $60 at July expiration. Sherwin Williams would have to rise by more than 10% before we would start to lose money. Learn more about this type of trade here.
SHW hasn't been above $60 by more than a few cents since December and has shown resistance around $57 recently. This trade could be risky if the company's earnings (due out in mid-July) are a positive surprise, but even if that happens, this position could be protected by resistance SHW might find from its 200-day moving average, which is currently around $59 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 SHW.
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