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Novartis AG (NYSE: NVS) shares are trading higher today after the company's blood pressure medicine Diovan was approved for the treatment of chronic heart failure by Health Canada, the Canadian federal department of medicine. 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 NVS.
After hitting a one-year high of $59.17 in January, the stock hit a one-year low of $46.64 last week. NVS opened this morning at $50.21. So far today the stock has hit a low of $49.70 and a high of $50.44. As of 11:55, NVS is trading at $50.19, up $1.19 (2.4%). The chart for NVS 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 $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 a 6.4% return in just 2 months as long as NVS is above $45 at May expiration. Novartis would have to fall by more than 10% before we would start to lose money.
NVS hasn't been below $46 at all in the past year and has shown support around $47 recently. This trade could be risky if the company's earnings (due out on 4/21) disappoint, but even if that happens, this position could be protected by the support the stock might find around $45, where it bottomed out in the past month.
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 NVS.
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