Lehman Brothers Holdings Inc. (NYSE: LEH) is rallying this morning after Bear Stearns (NYSE: BSC) announced that it expects about a $1.2 billion write-down in the fourth quarter, a number lower by about half than what was anticipated. 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 LEH.
After hitting a one-year high of $86.18 in February, the stock hit a one-year low of $49.06 in August. LEH opened this morning at $65.05. So far today the stock has hit a low of $64.10 and a high of $67.00. As of 11:00, LEH is trading at $65.28, up $1.79 (2.8%). The chart for LEH looks bullish but slightly deteriorating, while S&P gives the stock a negative 2 STARS (out of 5) sell rating.
For a bullish hedged play on this stock, I would consider a December bull-put credit spread below the $45 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. For this particular trade, we will make a 4.2% return in just six weeks as long as LEH is above $45 at December expiration. Lehman would have to fall by more than 31% before we would start to lose money. Learn more about this type of trade here.
LEH hasn't been below $49 at all in the past year and has shown support around $55 recently. This trade could be risky if the financial problems continue, but even if that happens, this position could be protected by support the stock formed between $50 and $55 in August and September.
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 LEH or BSC.
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