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Advance Auto Parts (NYSE: AAP - option chain) shares are dropping today after the company forecast a third-quarter profit of 57 cents per share, coming in way below analysts' estimates of 66 cents 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 AAP.This morning, AAP opened at $31.96. So far today the stock has hit a low of $27.73 and a high of $32.78. As of 12:05, AAP is trading at $29.71, down $4.66 (-13.6%). The chart for AAP looks neutral and S&P gives AAP a 3 STARS (out of 5) hold ranking.
For a bearish hedged play on this stock, I would consider a December bear-call credit spread above the $40 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 5.3% return in two and a half months as long as AAP is below $40 at December expiration. AAP would have to rise by more than 33% before we would start to lose money. Learn more about this type of trade here.
AAP has been above $40 as recently as mid-September but has fallen steeply recently and shown resistance around $40 over the past two weeks.
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 AAP.
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