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Lowe's (NYSE: LOW) shares are falling today after the Commerce Department reported that May home construction fell 3.3%, signaling continued weakness in the housing market and bad news for home improvement stores. 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 LOW.
After hitting a one-year high of $32.53 in September, the stock hit a one-year low of $19.94 in January. This morning, LOW opened at $24.15. So far today the stock has hit a low of $23.45 and a high of $24.23. As of 12:20, LOW is trading at $23.62, down $0.43 (-1.8%). The chart for LOW looks bullish but deteriorating, 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 an October bear-call credit spread above the $27.50 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 a 13.6% return in four months as long as LOW is below $27.50 at October expiration. Lowe's would have to rise by more than 16% before we would start to lose money. Learn more about this type of trade here.
LOW hasn't been above $27.50 since October and has shown resistance around $24 recently. This trade could be risky if the company's earnings (due out in late August) are a positive surprise, but even if that happens, this position could be protected by resistance LOW might find at its 200 day moving average, which is currently around $25 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 LOW.
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Reader Comments (Page 1 of 1)
6-18-2008 @ 12:28PM
Richard said...
Lowe's will continue to lose ground in the stock price until we see a definite upward movement in the housing market. Lowe's has little business in the new housing market, their business is mostly related to the homeowner and home remodeling contractors. If one looks at the history on the housing markets, Lowe's and Home Depot should actually be performing better because the homeowners will spend money fixing up their current houses when new construction takes a downward turn. Many people are starting to realize that the big box concept is less than stellar for their shopping needs and are turning to the smaller hardware and building supply retailers for better service, price, and quality of product.