AstraZeneca (NYSE: AZN) shares are trading higher after the FDA approved the company's anti-psychotic drug Seroquel as a maintenance treatment for patients with bipolar disorder. 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 AZN.
After hitting a one-year high of $56.60 in July, the stock hit a one-year low of $35.03 in March. AZN opened this morning at $41.50. So far today the stock has hit a low of $41.29 and a high of $41.76. As of 11:55, AZN is trading at $41.42, up $0.75 (1.8%). The chart for AZN looks bullish and deteriorating slightly, 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 October bull-put credit spread below the $35 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 14.9% return in just five months as long as AZN is above $35 at October expiration. AZN would have to fall by more than 15% before we would start to lose money. Learn more about this type of trade here.
AZN hasn't been below $35 at all in the past year and has shown support around $40 recently. This trade could be risky if another of the company's drugs runs afoul of regulatory agencies, but even if that happens, that position could be protected by support the stock might find from its 50-day moving average, which is currently around $40.
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 AZN.
Before the bell: Futures lower as oil rises, despite Alcoa earnings
Alcoa's Q2 2008 earnings transcript
Sir John Templeton, best contrarian investor of the 20th Century, dies at 95
