Goodyear Drops After Preferred Stock Offering

Posted Mar 28th 2011 1:30PM by Brent Archer
Filed under: Major Movement, Bad News, Options, Technical Analysis, Goodyear Tire and Rubber (GT)

Goodyear (GT - option chain) stock is trading lower today after the company announced a $435 million offering of preferred stock. The common stock is moving sharply lower this morning because it will be devalued when these preferred shares convert to common stock in 2014. 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 GT.

This morning, GT opened at $14.99. So far today the stock has hit a high of $15.20 and a low of $14.65. As of 12:25, GT is trading at $14.69, down $0.76 (-4.9%). The chart for GT looks neutral and S&P gives GT a neutral 3 STARS (out of 5) hold ranking.

For a bearish hedged play on this stock, I would consider a May bear-call credit spread above the $17 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 7.1% return in two months as long as GT is below $17 at May expiration. Goodyear would have to rise by more than 15% before we would start to lose money. Learn more about this type of trade here.

GT hasn't been above $17 at all since 2009 and has shown resistance around $15.70 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 GT.

Tags: Goodyear Tire and Rubber, GT, inthenews, Investors Observer, offering, options, preferred stock