Darden Restaurants (NYSE: DRI - option chain) stock traded lower Wednesday after the company, which includes Red Lobster and the Olive Garden, reported Q1 earnings Tuesday of $94.3 million. That is equal to 67 cents per share, which beat analysts' forecasts by a penny. However, Darden's net sales came in at $1.73 billion, missing analysts' forecasts of $1.78 billion by almost 3%. 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 DRI.
DRI opened at $33.53 Wednesday. In morning trading the stock hit a high of $33.58 and a low of $32.51. As of 11:15, DRI was trading at $32.86, down $3.32 (-9.2%). The chart for DRI looks bearish and S&P gives DRI a negative 2 STARS (out of 5) sell ranking.
For a bearish hedged play on this stock, I would consider a January bear-call credit spread above the $41 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 four months as long as DRI is below $41 at January expiration. Darden would have to rise by more than 24% before we would start to lose money.
DRI hasn't been above $41 by more than a few cents at all in the past year and has shown resistance around $37 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 DRI.
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