Nortel Networks Corp. (NYSE: NT) shares are trading higher today after the company announced Q3 earnings with a net income of $27 million, or 5 cents a share after one-time charges, compared with a net loss of $63 million, or 14 cents a share in the previous year. Analysts were expecting 12 cents per share, and NT beat that number before charges. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on NT.After hitting a one-year high of $31.79 in February, the stock hit a one-year low of $15.32 in September. NT opened this morning at $16.98. So far today the stock has hit a low of $16.75 and a high of $18.65. As of 10:45, NT is trading at $18.47, up $2.19 (13.4%). The chart for NT looks neutral and improving, while S&P gives the stock a 3 STARS (out of 5) hold rating.
For a bullish hedged play on this stock, I would consider a January bull-put credit spread below the $15 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 leverage nice returns. This particular trade will make an 8.7% return in just 3 months as long as NT is above $15 at January expiration. Nortel would have to fall by more than 19% before we would start to lose money.
NT hasn't been below $15 at all in the past year and has shown support around $15.50 recently. This trade could be risky if this morning's earnings are not as positive as they seem at first glance, but even if that happens, this position could be protected by strong support the stock has formed just above $15 over the past few months.
Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: At publication time, Brent neither owns nor controls positions in NT.
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