McDermott International (MDR - option chain) shares have risen over 10 percent in early trading on news that the company plans to split itself into two firms: The Babcock & Wilcox Co., and J. Ray McDermott. Current MDR shareholders will receive one share of each company when the transaction closes in 2010. B&W will manufacture nuclear components and other power generation systems. J. Ray will design, build and install offshore production facilities, pipelines and subsea systems. 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 MDR.MDR opened this morning at $22.40. So far today the stock has hit a low of $21.88 and a high of $23.05. As of 12:00, MDR is trading at $22.81 up $2.15 (10.4%). The chart for MDR looks bearish.
For a bullish hedged play on this stock, I would consider a January 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 seven weeks as long as MDR is above $20 at January expiration. McDermott would have to fall by more than 12% before we would start to lose money. Learn more about this type of trade here.
MDR has not been below $20 since early August and has shown support around $20.25 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 MDR.
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