Trade idea for Allergan (AGN) downgrade

Allergan (NYSE: AGN) is trading lower today after an analyst at Jeffries & Co. downgraded the stock to "Hold" from "Buy." AGN's price target was also cut to $62 from $78. 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 AGN.

After hitting a one-year high of $70.40 in January, the stock hit a one-year low of $52.26 last week. This morning, AGN opened at $55.65. So far today the stock has hit a low of $54.32 and a high of $56.45. As of 12:10, AGN is trading at $55.24, down $2.32 (-4.0%). The chart for AGN looks bearish but improving slightly, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.

For a bearish hedged play on this stock, I would consider a May bear-call credit spread above the $60 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 4.2% return in two weeks as long as AGN is below $60 at May expiration. Allergan would have to rise by more than 8% before we would start to lose money. Learn more about this type of trade here.

AGN hasn't been above $60 since February and has shown resistance around $60 recently. This trade could be risky if the company's earnings (due out on 5/7) are a positive surprise, but even if that happens, this position could be protected by resistance AGN might find around $60, where it topped out in early April.

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 AGN.