EnCana (NYSE: ECA - option chain) shares are rising today after the company announced it is planning to split into two companies: a natural gas producer and an integrated oil firm. ECA had originally planned to do this a year ago, but halted the plan after the financial crisis made the move more difficult. 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 ECA.ECA opened this morning at $58.27. So far today the stock has hit a low of $57.64 and a high of $59.00. As of 11:40, ECA is trading at $58.52 up $3.89 (7.1%). The chart for ECA looks bullish and S&P gives ECA a positive 4 STARS (out of 5) buy ranking.
For a bullish hedged play on this stock, I would consider a January bull-put credit spread below the $45 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 11.1% return in four months as long as ECA is above $45 at January expiration. EnCana would have to fall by more than 23% before we would start to lose money. Learn more about this type of trade here.
ECA has not been below $45 since July and has shown support around $49 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 ECA.
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