Reynolds American (NYSE: RAI - option chain) shares are rising today after a federal jury ruled that the company did not infringe upon Star Scientific Inc.'s (NASDAQ: STSI) patents regarding a method to reduce cancer-causing toxins in tobacco. The jury determined the two STSI patents at issue were not valid. STSI is expected to file an appeal. 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 RAI.RAI opened this morning at $37.03. So far today the stock has hit a low of $36.86 and a high of $37.97. As of 12:20, RAI is trading at $37.29 up.96 cents(2.6%). The chart for RAI looks neutral and S&P gives RAI a neutral 3 STARS (out of 5) hold ranking.
For a bullish hedged play on this stock, I would consider a November bull-put credit spread below the $30 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 a 12.3% return in five months as long as RAI is above $30 at November expiration. Reynolds would have to fall by more than 19% before we would start to lose money. Learn more about this type of trade here.
RAI has not been below $30 at all in the past year and has shown support around $36.50 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 RAI or STSI.
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