Texas Roadhouse (NASDAQ: TXRH - option chain) shares are dropping today after the company reported a third-quarter profit of $8.6 million, or 12 cents per share, missing analysts' estimates of 13 cents per share. TXRH also warned that earnings for 2008 will be flat with last year's numbers. It has been common wisdom that worried consumers won't be spending their cash on casual dining until they feel more confident about the economy, and the flat full-year forecast from TXRH seems to add weight to that thesis. 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 TXRH.
This morning, TXRH opened at $6.91. So far today the stock has hit a low of $6.23 and a high of $6.96. As of 12:20, TXRH is trading at $6.21, down $0.93 (-13.0%). The chart for TXRH looks bearish and S&P gives TXRH its lowest 1 STARS (out of 5) strong sell ranking.
For a bearish hedged play on this stock, I would consider a December bear-call credit spread above the $7.50 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 an 8.7% return with a small push in two months as long as TXRH is below $7.50 at December expiration. TXRH would have to rise by more than 20% before we would start to lose money. Learn more about this type of trade here.
TXRH has been above $7.50 as recently as last week but has fallen steeply today and shown resistance just above $7.50 recently.
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 TXRH.
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Reader Comments (Page 1 of 1)
11-06-2008 @ 11:11PM
Rick said...
We had a terrible dinner in the Seaford,De location everything was either not cooked right or burnt. We complained and the asst. mang. came out and said he knows the food was bad but hoped we would come back and try it again. After that we contacted them on line and was told we would be contacted within 72 hours, that was about a week and a half ago. I have NOT heard anything!!! This place does not care about people just your money!!!! Give them a message by NOT supporting them!