Genentech (DNA) soars on Avastin breast cancer approval

Genentech Inc. (NYSE: DNA) shares are trading higher this morning on news that the Food and Drug Administration granted conditional approval for its oncology drug Avastin for the treatment of breast cancer Friday after market close. The drug is already approved for the treatment of colorectal and lung cancers. 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 DNA.

After hitting a one-year high of $86.04 last February, the stock hit a one-year low of $65.35 in December. DNA opened this morning at $78.12. So far today the stock has hit a low of $77.57 and a high of $79.40. As of 10:45, DNA is trading at $78.06, up $6.46 (9.0%). The chart for DNA looks bullish 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 June bull-put credit spread below the $65 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 an 8.7% return in just four months as long as DNA is above $65 at June expiration. Genentech would have to fall by more than 16% before we would start to lose money.

DNA hasn't been below $65 at all in the past year and has shown support around $70 recently. This trade could be risky if there is new bad news about one of the company's drugs, but even if that happens, this position could be protected by the support the stock might find around $67, where DNA bottomed this past winter.

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