Sun Microsystems (JAVA) drops on forecast of losses

Sun Microsystems (NASDAQ: JAVA) shares are falling today after the company warned it will likely not turn a profit in the current quarter, despite having earnings come in at the high end of estimates this morning and announcing a stock buyback. JAVA executives said a weak financial sector has led to lower sales for the company. 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 JAVA(see more pf today's earnings news).

After hitting a one-year high of $25.04 in October, the stock hit a one-year low of $8.63 in July. This morning, JAVA opened at $9.84. So far today the stock has hit a low of $9.10 and a high of $10.02. As of 12:10, JAVA is trading at $9.31, down 1.32 (-12.4%). The chart for JAVA looks bearish and improving slightly, while S&P gives the stock a bearish 2 STARS (out of 5) sell rating.

For a bearish hedged play on this stock, I would consider an October bear-call credit spread above the $11 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 an 11.1% return in eleven weeks as long as JAVA is below $11 at October expiration. Sun Micro would have to rise by more than 18.5% before we would start to lose money. Learn more about this type of trade here.

JAVA hasn't been above $11 since late June and has shown resistance around $10.15 recently. This trade could be risky if the overall market starts to rally, but even if that happens, this position could be protected by resistance JAVA might find at its 50 day moving average, which is currently around $11 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 JAVA.