Mercadolibre (NASDAQ: MELI) shares are trading higher today after the company's CEO terminated a prearranged stock trading plan that could have sold up to 1,768,794 shares of MELI. A few analysts released notes today after this news that were generally positive on MELI's outlook. 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 MELI.
After hitting a one-year low of $21.00 in August, the stock hit a one-year high of $81.17 in December. MELI opened this morning at $28.50. So far today the stock has hit a low of $27.65 and a high of $30.73. As of 12:15, MELI is trading at $30.45, up $3.66 (13.7%). The chart for MELI looks bearish and steady.
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 an 8.7% return in just ten weeks as long as MELI is above $20 at September expiration. MELI would have to fall by more than 35% before we would start to lose money.
MELI hasn't been below $21 at all in the past year and has shown support around $26 recently. This trade could be risky if the company's earnings (due out in August) disappoint, but even if that happens, this position could be protected by the support the stock might find from bargain hunters who look at its year-high above $80 and see a value stock.
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 MELI.
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