Morgan Stanley (NYSE: MS) stock is falling this morning after an analyst at Punk, Ziegel & Co. reiterated the stock at "Sell" but lowered his price target for the stock to $43 from $49. He also lowered his first-quarter EPS estimate for MS to 75 cents from $1.70, and lowered his 2008 EPS estimate to $5.38 from $6.93. The analyst is the latest in a line of peers reducing expectations for the sector, but also added that Ben Bernanke's warning about possible bank failures in Congressional testimony on Thursday was unnecessary, saying that he thinks "most banks are well capitalized by the standards established by Mr. Bernanke's agency." 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 MS.After hitting a one-year high of $90.95 in July, the stock hit a one-year low of $40.76 last week. This morning, MS opened at $43.60. So far today the stock has hit a low of $43.05 and a high of $44.00. As of 11:00, MS is trading at $43.07, down $1.34 (-3.0%). The chart for MS looks bearish but improving slightly, while S&P gives the stock a negative 2 STARS (out of 5) sell rating.
For a bearish hedged play on this stock, I would consider a July 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. For this particular trade, we will make a 5.3% return in two and a half months as long as MS is below $55 at July expiration. Morgan Stanley would have to rise by more than 25% before we would start to lose money.
MS hasn't been above $55 by more than a few cents since November and has shown resistance around $45 recently. This trade could be risky if the US economy turns around quickly, but even if that happens, this position could be protected by resistance MS might find at its 50-day moving average, which is currently around $48 and falling.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in MS.
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