Make smart financial decisions with DailyFinance

AOL Money & Finance

Bear Stearns (BSC) reeling from more bad financial news

More

BSC logoBear Stearns Companies Inc. (NYSE: BSC) stock is struggling as many of its competitors have announced large write-downs on holdings of mortgage securities and leveraged loans over the past week in the wake of the credit crunch. Merrill Lynch (NYSE: MER) and Washington Mutual (NYSE: WM) both took large write-downs last week, and JP Morgan (NYSE: JPM) and Bank of America (NYSE: BAC) are expected to write down a total of around $3 billion combined when they report earnings later this week. Merrill also got downgraded by two firms over the weekend after Friday's write-down. 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 BSC.

After hitting a one-year high of $172.61 in January, the stock fell to a one-year low of $99.75 in August. This morning, BSC opened at $129.30. So far today the stock has hit a low of $126.95 and a high of $129.40. As of 11:15, BSC is trading at $127.39, down $4.19 (-3.2%). The chart for BSC looks neutral but improving, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.

For a bearish hedged play on this stock, I would consider a January bear-call credit spread above the $165 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 6.4% return in 4 months as long as BSC is below $165 at January expiration. Bear would have to rise by more than 33% before we would start to lose money. Learn more about this type of trade here.

BSC has not been above $165 since February, and has shown some resistance around $150 recently. This trade could be risky if the company's earnings (due out in mid- December) disappoint, but even if that happens, this position could be protected by the resistance the stock formed around $158 where the stock formed a top in April.

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 BSC, BAC, MER, or JPM. He does control a bullish hedged position in WM.

Reader Comments (Page 1 of 1)

Symbol Lookup
IndexesChangePrice
DJIA-36.658,146.52
NASDAQ+3.481,756.03
S&P 500-3.55879.13

Last updated: July 11, 2009: 05:01 AM

BloggingStocks Exclusives

Hot Stocks

DailyFinance Headlines

Latest from BloggingBuyouts

TheFlyOnTheWall.com Headlines

    BioHealth Investor Headlines

    WalletPop Headlines

    My Portfolios

    Track your stocks here!

    Find out why more people track their portfolios on AOL Money & Finance then anywhere else.

    BloggingStocks Partners

    More from AOL Money & Finance

    WalletPop Headlines