Filed under: Major movement, Earnings reports, Bad news, Industry, Research in Motion (RIMM), Palm Inc (PALM), Options, Technical Analysis
Palm, Inc (NASDAQ: PALM) shares are falling this day after after the company reported a fourth-quarter loss $43.4 million, or 40 cents per share. PALM’s adjusted loss of 22 cents per share was worse than analysts’ predictions of an 18 cent loss. That this news comes one day after Canadian competitor Research in Motion (NASDAQ: RIMM) also tumbled on their earnings release does not bode well for the economy or gadget-makers in general. 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 PALM.
After hitting a one-year high of $19.23 in October, the stock hit a one-year low of $4.21 in March. This morning, PALM opened at $6.15. So far today the stock has hit a low of $5.79 and a high of $6.37. As of 12:40, PALM is trading at $5.85, down 69 cents (-10.6%). The chart for PALM looks bullish but deteriorating slightly, while S&P gives the stock a negative 2 STARS (out of 5) sell rating.
For a bearish hedged play on this stock, I would consider a November bear-call credit spread above the $7.50 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 an 11.1% return in five months as long as PALM is below $7.50 at November expiration. Palm would have to rise by more than 27% before we would start to lose money. Learn more about this type of trade here.
PALM hasn’t been above $7.50 by more than a few cents since November and has shown resistance around $6.80 recently. This trade could be risky if the economy finds its footing, but even if that happens, this position could be protected by resistance PALM might find at its 200 day moving average, which is currently around $8 and falling.
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 PALM or RIMM.
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