LM Ericsson (ERIC) drops 10% on handset forecast

Posted Mar 20th 2009 12:50PM by Brent Archer
Filed under: Major Movement, Forecasts, Bad News, Sony Corp ADR (SNE), Options, Technical Analysis

LM Ericsson (NASDAQ: ERIC - option chain) stock is falling today after Sony Ericsson, the joint venture between Sony (NYSE: SNE) and ERIC, forecast continued weak mobile phone handset sales. Things are so bad that they expect to ship only half the phones this quarter that they did last, but keep in mind last wuarter included the holiday season. 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 ERIC.

This morning, ERIC opened at $8.44. So far today the stock has hit a low of $8.22 and a high of $8.53. As of 11:50, ERIC is trading at $8.31, down 99 cents (-10.7%). The chart for ERIC looks neutral and S&P gives ERIC a 3 STARS (out of 5) hold ranking.

For a bearish hedged play on this stock, I would consider a July bear-call credit spread above the $10 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 three months as long as ERIC is below $10 at July expiration. Ericsson would have to rise by more than 20% before we would start to lose money. Learn more about this type of trade here.

BA hasn't been above $30 since September and shown resistance around $9.60 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 BA.

Tags: ERIC, forecast, inthenews, Investors Observer, InvestorsObserver, lm ericsson, LmEricsson, mobile phones, MobilePhones, options, SNE, Sony, sonyericsson