United Airlines (UAUA) lower on downgrade despite lower oil prices

UAL Corporation (NASDAQ: UAUA) stock is falling this morning after being downgraded to Equal Weight from Overweight. The Lehman Brothers analyst cited concerns about the stock price being overly inflated due to merger speculation. This negative stock action comes despite lower oil prices today, which are generally a bullish sign 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 UAUA.

After hitting a one-year high of $51.60 in October, the stock has declined over the past two months. This morning, UAUA opened at $40.27. So far today the stock has hit a low of $39.70 and a high of $40.66. As of 10:55, UAUA is trading at $40.19, down $0.75 (-1.7%). The chart for UAUA looks bearish and steady, 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 January 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. This particular trade will make a 6.4% return in 7 weeks as long as UAUA is below $55 at January expiration. United would have to rise by more than 36% before we would start to lose money.

UAUA hasn't been above $55 at all in the past year and has shown resistance around $42 recently. This trade could be risky if the price of fuel comes down dramatically, but if that happens, it will probably mean we are in a recession, which is not good for UAUA anyway.

Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in UAUA.