Talbots Inc. (NYSE: TLB) shares are trading higher today after the company affirmed its 2008 earnings forecast. TLB expects to earn an adjusted profit between 47 and 52 cents per share, above analysts' estimates of 41 cents per share. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on TLB.
After hitting a one-year high of $26.10 in August, the stock hit a one-year low of $6.48 in January. TLB opened this morning at $9.05. So far today the stock has hit a low of $8.76 and a high of $9.05. As of 11:20, TLB is trading at $8.91, up $0.60 (7.2%). The chart for TLB looks bearish and improving slightly.
For a bullish hedged play on this stock, I would consider a November covered call at the $7.50 level. A covered call is an options position that combines the purchase of stock with the 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 17.2% return in just five and a half months as long as TLB is above $7.50 at November expiration. Talbots would have to fall by more than 27% before we would start to lose money. Learn more about this type of trade here.
TLB hasn't been below $6.40 (which is the break-even point of the trade above) at all in the past year and has shown support around $8 recently. This trade could be risky if the company's earnings (due out on 8/27) disappoint, but even if that happens, that position could be protected by support the stock might find around $7.50, where it has traded for much of the past six months.
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 TLB.
Tesla Roadster sets a record -- travels 313 miles on a single charge
Cramer on BloggingStocks: China's industrial focus helps lots of U.S. names 
Why do we have a weak dollar?
