Sandisk (SNDK) flat on new Buy rating; a trade opportunity?

SanDisk Corp. (NASDAQ: SNDK) opened higher this morning after Lazard Capital initiated coverage on the stock with a buy rating, but the stock has slipped as all the major averages have given up their early gains. If you think the buy rating means that the company won't fall too far in the near future, then now could be a good time to look at a bullish hedged trade on SNDK.

After hitting a one-year high of $62.24 in October 2006, the stock dipped sharply to a year-low of $35.82 in March. Shares climbed for the next several months before leveling off over the last six weeks right around $55. SNDK opened this morning at $53.93. So far today the stock has hit a low of $52.56 and a high of $54.20. As of 10:40, SNDK is trading at $52.90, down 0.03 (-0.1%). The chart for SNDK looks bullish but deteriorating, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.

For a bullish hedged play on this stock, I would consider an October bull-put credit spread below the $45 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverages nice returns. For this particular trade, we will make an 8.7% return in just 6 weeks as long as SNDK is above $45 at October expiration. Sandisk would have to fall by more than 16% before we would start to lose money.