Altria (NYSE: MO - option chain) stock is falling today after a Florida jury found that the death of a smoker was caused by his addiction to cigarettes. MO's subsidiary Philip Morris now is involved in the second phase of the trial , which is to decide who is at fault for his addiction. This is the first case in which an individual smoker's family sued a tobacco company for death by cigarette addiction. This is a tough precedent for MO and the cigarette industry, as it opens the industry up to potentially limitless civil suits from individual smokers. While I believe that cigarette stocks are well-suited to our current environment, Phillip Morris International (NYSE: PM), a former subsidiary of MO, looks much more attractive to me, due in part to its lower exposure to the American legal system. PM is off by only 0.6% today compared to MO' s 3.5%. If you think Altria stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on MO.
This morning, MO opened at $16.35. So far today the stock has hit a low of 15.90 and a high of $16.39. As of 12:00, MO is trading at $15.95, down 60 cents (-3.6%). 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 June 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 a 14.3% return in four months as long as MO is below $18 at June expiration. Altria would have to rise by more than 12% before we would start to lose money. Learn more about this type of trade here.
MO hasn't been above $30 since early November and shown resistance around $17.10 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 controls bullish hedged positions in MO & PM.
Comfort Zone Investing: Why GE's Dividend Increase Matters
Six Deadbeat Stocks to Clean Out of Your Portfolio
Federal Reserve Ordered to Release Bail Out Documents
