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Altria (NYSE: MO) shares are trading higher today, getting a boost from news that menthol is getting special protection in a new bill as Congress attempts to regulate the tobacco industry. Menthol brands, which make up about one-fourth of the US tobacco output, is getting an exemption from a ban on cigarette flavoring like cinnamon and clove. If you think that the stock 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 MO.
After hitting a one-year high of $79.59 in January, the stock spun-off Phillip Morris International (NYSE: PM) in March and hit a one-year low of $19.95 early this month. MO opened this morning at $21.57. So far today the stock has hit a low of $21.50 and a high of $21.94. As of 1:00, MO is trading at $21.85, up $0.27 (1.2%). The chart for MO looks bearish and steady, while S&P gives the stock its highest 4 Stars (out of 5) strong buy rating.
For a bullish hedged play on this stock, I would consider a September bull-put credit spread below the $20 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 19.0% return in just four and a half months as long as MO is above $20 at September expiration. Altria would have to fall by more than 20% before we would start to lose money. Learn more about this type of trade here.
MO hasn't been below $20 by more than a few cents in the past year and has shown support around $21 recently. This trade could be risky if the legislation of tobacco gets tougher in the coming months, but even if that happens, that position could be protected by support the stock might find just above $20, 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 controls a bullish hedged trade on MO and PM.
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Reader Comments (Page 1 of 1)
5-13-2008 @ 3:21PM
gumbo koontz said...
Altira ought to talk with politicians about designating proper places for smoking customers to smoke away from passer-by people both indoors and outdoors. Smokers should be allowed to smoke at designated indoors so non smokers will know not to enter. I am not against smokers. I am against the concept of smoking so freely anywhere one damn pleases. I am only too happy to see smokers dying as long as they stay out of our faces. Smokers dont realize how much space their second hand smoke violates the whole time!! Just shove smokers to their rightful places... We have rights to know where they smoke so to avoid them at sufficient distances usually at least 50 feet or even 200 feet, imagine that.. Cigarettes really stinks!!
5-13-2008 @ 3:41PM
Michael Schneider said...
All the tobaccos were moving higher today on this but also there was a favorable court decision yesterday which may have helped and in the last week an analyst made comments about tobaccos like UST and Reynolds being oversold.
5-14-2008 @ 6:13PM
Kenneth said...
Oh yeah - the cinnamon flavoring is keeping people smoking - not the hot chics.
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