Bear 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.
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Reader Comments (Page 1 of 1)
10-08-2007 @ 12:40PM
wildbill said...
Given the present market those that have a profit may think about taking it and going cash heavy until the uncertain factors become known. There are two major problems at hand, one being the mortgage industry and the other being the short term paper. While we use frequent reporting much is based on a "best guess" principal and is always subject to revision. This is fine as it tends to keep the investors abreast of conditions as long as reporting remains honest. As everyone still remembers Enron, a little caution might be prudent. NYC is a financial capitol, but so is London. The word LIBOR appears frequently when short term paper is discussed. The BoE is currently adjusting inter-bank rate policy, in part due to public pressure and the problems that emerged at Northern Rock. On Dec. 7 all UK financials report fully audited results. A smart investor would be wise to "keep their ear to the ground" - on both sides of the Atlantic.