Schering-Plough Corp. (NYSE: SGP) shares are trading higher this morning after the company reported a fourth-quarter profit of 27 cents per share, excluding special items. Analysts expected a profit of 24 cents per share. After accounting for special charges from its acquisition of Organon Biosciences late last year, SGP actually lost $3.4 billion, or $2.08 per share, in the quarter, but investors are usually more interested in the adjusted numbers. 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 SGP.After hitting a one-year high of $33.81 in May, the stock hit a one-year low of $17.45 in January. SGP opened this morning at $21.43. So far today the stock has hit a low of $21.26 and a high of $22.01. As of 10:40, sGP is trading at $21.73, up $1.11 (5.4%). The chart for SGP looks bearish and steady, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bullish hedged play on this stock, I would consider a May bull-put credit spread below the $17.50 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 a 11.1% return in just three months as long as SGP is above $17.50 at May expiration. Schering-Plough would have to fall by more than 19% before we would start to lose money.
SGP hasn't been below $17.50 by more than a few cents in the past year and has shown support around $19.50 recently. This trade could be risky if the company finds more legal trouble concerning the Vytorin situation, but even if that happens, this position could be protected by the support the stock has found between $18 and $20 over the past month.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent both owns and controls bullish hedged positions in SGP.
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