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Continental Airlines, Inc. (NYSE: CAL) shares are declining this morning with other airline stocks as oil futures are rebounding from yesterday's drop. The strong showing for oil is due to a pipeline fire in Minnesota. 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 CAL.After hitting a one-year high of $52.40 in January, the stock hit a one-year low of $25.18 last week. This morning, CAL opened at $28.55. So far today the stock has hit a low of $28.50 and a high of $29.09. As of 11:05, CAL is trading at $27.00, down $0.98 (-3.5%). The chart for CAL 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 a January bear-call credit spread above the $35 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. This particular trade will make a 7.5% return in 2 months as long as CAL is below $35 at January expiration. Continental would have to rise by more than 29% before we would start to lose money.
CAL hasn't been above $35 since October and has shown resistance around $32 recently. This trade could be risky if the price of fuel comes down dramatically, but even if that happens, this position could be protected by the resistance CAL should find at its 200 day moving average, which is right at $35 and falling.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in CAL.
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