CVS Caremark (NYSE: CVS - option chain) stock is declining sharply this morning after the company forecast a fiscal-2009 EPS of $2.53 to $2.61, well below analysts' estimates of $2.74. The company cited lower sales of prescription drugs for the forecast. If you think this stock won't be rising too far in the coming months as a result of this news, then it could be a good time to look at a bearish hedged play on CVS.This morning, CVS opened at $27.00. So far today the stock has hit a low of $25.50 and a high of $27.09. As of 12:45, CVS is trading at $25.84, down $3.50 (-11.9%). The chart for CVS looked bullish up until today and S&P gives CVS its highest 5 STARS (out of 5) strong buy ranking.
For a bearish hedged play on this stock, I would consider a February bear-call credit spread above the $30 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 six weeks as long as CVS is below $30 at February expiration. CVS would have to rise by more than 16% before we would start to lose money. Learn more about this type of trade here.
CVS hasn't been above $30 by more than a few cents since November and shown resistance around $29.50 recently.
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 CVS.
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