Barr Pharmaceuticals Inc. (NYSE: BRL) shares are rising today after the company announced yesterday evening that a U.S. District Court ruled in favor of Barr, invalidating a patent protecting Bayer AG's Yasmin oral contraceptive. 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 BRL.
After hitting a one-year low of $45.41 in April, the stock hit a one-year high of $58.38 in November. BRL opened this morning at $49.07. So far today the stock has hit a low of $48.45 and a high of $49.99. As of 12:30, BRL is trading at $49.75, up $4.08 (8.9%). The chart for BRL looks neutral and steady while S&P gives BRL a positive 4 STARS (out of 5) buy rating.
For a bullish hedged play on this stock, I would consider an April bull-put credit spread below the $45 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. For this particular trade, we will make an 8.7% return in just one and a half months as long as BRL is above $45 at April expiration. Barr would have to fall by more than 9% before we would start to lose money.
BRL hasn't been below $45 at all in the past year. This trade could be risky if any of the company's products find trouble with the FDA, but even if that happens, this position could be protected by the support the stock might have formed when it bounced just above $45 earlier this week.average.
Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in BRL.
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