Lowe's (LOW) dives on Q2 earnings

Posted Aug 17th 2009 1:20PM by Brent Archer
Filed under: Major Movement, Earnings Reports, Bad News, Lowe's Cos (LOW), Options, Technical Analysis

Lowe's Companies (NYSE: LOW - option chain) stock is falling today after the company reported a second-quarter profit this morning of $1.23 billion, or $0.51 per share, missing analysts' projections of $0.54 per share. Sales came in at $13.8B, down from $14.5B last year. The company blamed slowing sales of large items for the weakness. 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.

This morning, LOW opened at $20.43. So far today the stock has hit a low of $20.25 and a high of $22.29. As of 12:15, LOW is trading at $20.90, down $1.91 (-8.4%). The chart for LOW looks neutral and S&P gives LOW a neutral 3 STARS (out of 5) hold ranking.

For a bearish hedged play on this stock, I would consider a January bear-call credit spread above the $25 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 19.0% return in five months as long as LOW is below $20 at January expiration. Lowe's would have to rise by more than 20% before we would start to lose money.

LOW hasn't been above $25 since September of last year and shown resistance around $24 recently.

Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in LOW.

Tags: earnings, inthenews, Investors Observer, InvestorsObserver, LOW, Lowes, options