Shares of Signet Jewelers (NYSE: SIG) fell more than 20% this morning after the company reduced Q4 guidance based on weaker than expected holiday sales. The company revised the midpoint of its quarterly EPS estimate from $4.47 to $3.85.

Obviously, this is bad news for our position in SIG and clearly not what we expected. That said, the objective now is to minimize our loss in this position by objectively assessing our choices and articulating a plan of action.

Options Holders

If you bought the $35 call option that expires on April 19, it is now deep out-of-the-money and will most likely expire worthless barring unexpected good news between now and then.

I do not expect SIG to get back to our $35 strike price soon, but I think it will gradually recover near $30 once equilibrium between buy and sell orders has been reestablished. If that occurs, there are two ways to recoup some of the $5 premium paid for the original call option:

1. Buy a new call at the $24 strike price for no more than $4.50 (trading at a bid/ask of $4.10/4.70 when this alert was issued). If SIG trades up to $32 over the next three months, then nearly half of the original premium could be recovered and perhaps more than that depending on how much time premium is remaining.
2. Sell a short put at the $24 strike price for $2.50 (trading at a bid/ask of $2.25/2.75 when this alert was issued). If SIG bottoms out this week and goes no lower by expiration date then half of the original premium could be recovered when this option expires worthless.

Stockholders

If you own shares of SIG, we advise holding onto them until the current spate of selling pressure has abated (during the first hour of trading this morning, trading volume in SIG was already more than three times its average daily volume). As I mentioned above, I expect SIG’s share price to gradually drift higher once this week’s sell orders have cleared the books.

Later on, you should be able to write a covered call on SIG at a strike price that, when combined with the premium received, will recoup your original investment. That may not happen until the second half of this year, but in the meantime you will continue to collect SIG’s dividend payment of roughly 4%.