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Wachovia Corp. (NYSE: WB) and most of the financial sector are slipping today due to continuing concerns about the financial sector on Wall Street. Competitor Credit Suisse (NYSE: CS) announced $1.9 billion in write-downs today, and Citigroup (NYSE: C) was downgraded at CIBC from sector perform to underperform on concerns that it may have to cut its dividend. If you think fincncial sector 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 WB.After hitting a one-year high of $58.80 in February, the stock has been struggling lately, hitting a 52-week low today. This morning, WB opened at $44.31. So far today the stock has hit a low of $43.38 and a high of $44.44. As of 11:15, WB is trading at $43.78, down $1.95 (-4.3%). The chart for WB looks bearish and steady, while S&P gives the stock its highest 5 STARS (out of 5) strong buy rating.
For a bearish hedged play on this stock, I would consider an April bear-call credit spread above the $55 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 6 months as long as WB is below $55 at April expiration. Wachovia would have to rise by more than 25% before we would start to lose money.
WB hasn't been above $55 since June and has shown resistance around $51 recently. This trade could be risky if the economy and especially the housing market turns around, but even if that happens, this position could be protected by strong resistance WB has found around $52, where the stock has topped in early October.
Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: At publication time, Brent neither owns nor controls positions in WB, C, or CS.
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