UBS (NYSE: UBS - option chain) stock is trading lower today after the Wall Street Journal reported the company plans to issue covered bonds, an instrument previously shunned by Swiss banks. UBS hopes the usage of covered bonds will allow it to refinance residential mortgages that remain on its balance sheet at advantageous terms. If you think this 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 USB.
This morning, RIG opened at $17.67. So far today the stock has hit a low of $17.05 and a high of $17.97. As of 11:55, UBS is trading at $17.11, down $1.21 (-6.6%). The chart for USB looks neutral and S&P gives UBS a neutral 3 STARS (out of 5) hold ranking.
For a bearish hedged play on this stock, I would consider an October bear-call credit spread above the $20 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 seven weeks as long as UBS is below $20 at October expiration. UBS would have to rise by more than 19% before we would start to lose money.
UBS hasn't been above $20 since last October and shown resistance around $18.50 recently.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in UBS.
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Reader Comments (Page 1 of 1)
9-01-2009 @ 1:46PM
cabo79 said...
COVERED BONDS, You got to be shi..ing me. Who's going to cover them, AIG? Selling insurance on something that you can't in a million years cover if the sky should fall, again. How stupid are the investor that buy this crap?