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O'Reilly Automotive Inc. (NASDAQ: ORLY) shares are trading higher today the company said it will acquire CSK Auto Corp. (NYSE: CAO) for $500 million in a cash and stock deal. The combined company will be the third-largest U.S. auto parts retailer. 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 ORLY.
After hitting a one-year high of $38.84 last April, the stock hit a one-year low of $24.08 in January. ORLY opened this morning at $29.45. So far today the stock has hit a low of $29.18 and a high of $30.50. As of 12:20, ORLY is trading at $29.94, up $1.42 (5.0%). The chart for ORLY 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 an August bull-put credit spread below the $25 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 5 months as long as ORLY is above $25 at August expiration. O'Reilly would have to fall by more than 16% before we would start to lose money. Learn more about this type of trade here.
ORLY hasn't been below $25 for more than a few days in the past year and has shown support around $28 recently. This trade could be risky if the company's earnings (due out in late April) disappoint, but even if that happens, this position could be protected by the strong support he stock formed around $26, where it bottomed a few weeks ago.
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 ORLY or CAO.
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