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AMR Corporation (NYSE: AMR) stock is lower today as AMR's subsidiary, American Airlines, officially opened contract negotiations with mechanics and other ground workers on Wednesday. This is generally a good thing for AMR, but is being overshadowed by soaring crude futures which are pushing fuel costs higher for airlines. 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 AMR.After hitting a one-year high of $41 in January, the stock hit a one-year low of 20.28 in September. This morning, AMR opened at $21.54. So far today the stock has hit a low of $21.20 and a high of $22.00. As of 10:45, AMR is trading at $21.80, down $0.23 (-1.0%). The chart for AMR looks bullish but deteriorating, 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 December bear-call credit spread above the $27.50 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 an 8.7% return in 7 weeks as long as AMR is below $27.50 at December expiration. AMR would have to rise by more than 24% before we would start to lose money.
AMR hasn't been above $27.50 since July and has shown resistance around $24.50 recently. This trade could be risky if the price of oil relaxes and fuel costs subside, but even if that happens, this position could be protected by strong resistance AMR has found around $25, where the stock topped in early October.
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 AMR.
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