Charles Schwab (SCHW - option chain) stock is trading lower today after the company said it expects fourth-quarter earnings will be 2 to 4 cents a share lower than the 17-cent profit reported for the third quarter. Analysts have forecast a profit of 17 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 SCHW.This morning, SCHW opened at $18.04. So far today the stock has hit a high of $18.35 and a low of $17.74. As of 12:00, SCHW is trading at $17.89, down 54 cents(-2.9%). The chart for SCHW looks bearish and S&P gives SCHW a negative 2 STARS (out of 5) sell ranking.
For a bearish hedged play on this stock, I would consider a March bear-call credit spread above the $20 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 14.3% return in three months as long as SCHW is below $20 at March expiration. Schwab would have to rise by more than 11% before we would start to lose money. Learn more about this type of trade here.
SCHW hasn't been above $20 at all since October of 2008 and has shown resistance around $18.75 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 SCHW.