Western Digital (NYSE: WDC - option chain) shares are rising today after Standard & Poor's announced yesterday that WDC will be added to the S&P 500 to replace Embarq (NYSE: EQ), which is being acquired by CenturyTel Inc. (NYSE: CTL). When this happens, mutual funds and other services that track the S&P 500 will have to buy WDC, which usually gives the stock a boost higher or at least a floor. 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 WDC.WDC opened this morning at $24.95. So far today the stock has hit a low of $24.35 and a high of $25.25. As of 11:30, WDC is trading at $24.68 up 0.32 (1.3%). The chart for WDC looks bearish and S&P gives WDC a negative 2 STARS (out of 5) sell ranking.
For a bullish hedged play on this stock, I would consider a July 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 two months as long as WDC is above $20 at July expiration. WDC would have to fall by more than 18% before we would start to lose money. Learn more about this type of trade here.
WDC has not been below $20 at all since April and has shown support around $21.75 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 WDC, EQ, nor CTL.
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