Lehman Brothers Holdings Inc. (NYSE: LEH) shares are rising today after the investment bank posted first-quarter earnings of $489 million, or 81 cents per share, ahead of analysts' predictions of 72 cents per share. LEH took a $1.8 billion write-down during the first quarter because of deterioration in the credit markets. LEH's earnings news, combined with similar results from Goldman Sachs (NYSE: GS) helped the market open strong this morning, relieving investors after the weekend collapse and buyout on the cheap of rival Bear Stearns (NYSE: BSC). 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 LEH.
After hitting a one-year high of $82.05 in June, the stock hit a one-year low of $20.25 yesterday. LEH opened this morning at $38.04. So far today the stock has hit a low of $35.67 and a high of $44.78. As of 12:10, LEH is trading at $42.42, up $10.67 (33.6%). The chart for LEH looks bearish and steady, while S&P gives the stock a negative 2 STARS (out of 5) hold rating.
For a bullish hedged play on this stock, I would consider an April bull-put credit spread below the $12.50 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. For this particular trade, we will make a 4.2% return in just one month as long as LEH is above $12.50 at April expiration. Lehman would have to fall by more than 70% before we would start to lose money.
LEH hasn't been below $20 at all this year and bounced hard off of that level yesterday. This trade could be risky if the major investment banks are not saved by the recent Fed actions, but even if that happens, this position could be protected by the support the stock might find around $20 where it bounced yesterday.
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 LEH, GS, or BSC.
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