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CVS|Caremark (CVS - option chain) shares are rising today on news that the company won a new $1 billion contract with the Teacher Retirement System of Texas to provide pharmacy benefits for two years, with four optional one-year renewals. 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 CVS.CVS opened this morning at $31.80. So far today the stock has hit a low of $31.80 and a high of $32.43. As of 11:55, CVS is trading at $32.20 up 70 cents (2.2%). The chart for CVS looks bullish and S&P gives CVS a positive 4 STARS (out of 5) buy ranking.
For a bullish hedged play on this stock, I would consider a February bull-put credit spread below the $28 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 9.1% return in ten weeks as long as CVS is above $28 at February expiration. CVS would have to fall by more than 13% before we would start to lose money. Learn more about this type of trade here.
CVS has not been below $28 except for one day since May and has shown support around $30 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 CVS.
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