La Z Boy (LZB - option chain) stock is traded much lower Tuesday after the company reported fourth-quarter 2009 earnings, posting an adjusted profit of 24 cents per share on revenue of $310 million. Analysts had forecast a profit of 23 cents per share on revenue of $307 million. However, shares of the stock are falling due to a cautious 2010 outlook. CEO Kurt Darrow warned that the company will need to boost sales and cut costs to counteract various macroeconomic factors, including high unemployment and housing volatility. 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 LZB.
LZB opened Tuesday at $11.01. In morning trading, the stock hit a high of $11.19 and a low of $10.12. As of 12:00, LZB was trading at $10.19, down $2.21 (-17.8%). The chart for LZB looks bearish and S&P gives LZB a negative 2 STARS (out of 5) sell ranking.
For a bearish hedged play on this stock, I would consider an October bear-call credit spread above the $15 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 LZB is below $15 at October expiration. La Z Boy would have to rise by more than 47% before we would start to lose money.
LZB hasn't been above $15 in the past year for more than a few days and has shown resistance around $13 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 LZB.