Altria (NYSE: MO - option chain) shares have slid lower today after the US Supreme Court ruled against the Phillip Morris USA in a "light" cigarette case. The ruling allows MO to be sued for deceptive advertising of light cigarettes, which in reality are no better than normal ones. If you think that the stock won't rise by too much in the coming months, then now could be a good time to look at a bearish hedged trade on MO.This morning, MO opened at $15.71. So far today the stock has hit a low of $14.96 and a high of $15.88. As of 12:40, MO is trading at $15.26, down 8 cents (-0.5%). The chart for MO looks bullish and S&P gives MO a positive 5 STARS (out of 5) strong buy ranking.
For a bearish hedged play on this stock, I would consider a March bear-call credit spread above the $18 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 11.1% return in three months as long as MO is below $18 at March expiration. Altria would have to rise by more than 17% before we would start to lose money.
MO hasn't been above $18 since early November and shown resistance around $16 recently.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in MO.
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Reader Comments (Page 1 of 1)
12-15-2008 @ 3:38PM
BHarrison said...
Well, many smokers are not going to be able to afford the high costs of the "luxury" of smoking when they are unemployed or in a tight financial situation. As difficult as it might be . . . a lot of them may have to quit or cut back on smoking . . . . there goes those tax revenues (and stock values).