ImClone Systems (NASDAQ: IMCL) shares are falling after an analyst at Morgan Stanley downgraded the stock to Underweight from Equal Weight, saying that an upcoming drug study announcement will not please investors. 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 IMCL.After hitting a one-year low of $30.34 in August, the stock hit a one-year high of $49.18 in April. This morning, IMCL opened at $42.66. So far today the stock has hit a low of $41.94 and a high of $43.49. As of 12:40, IMCL is trading at $42.02, down $2.81 (-6.3%). The chart for IMCL looks bullish but deteriorating, 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 June bear-call credit spread above the $50 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 an 8.7% return in six weeks as long as IMCL is below $50 at June expiration. Hershey would have to rise by more than 18% before we would start to lose money.
IMCL hasn't been above $50 at all in the past year and has shown resistance around $47.50 recently. This trade could be risky if the company continues its upward climb, but even if that happens, this position could be protected by resistance IMCL might find around $49, where the stock topped over the past month.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in IMCL.
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