Walgreen Rises on New Deal with CVS Caremark

Posted Jun 18th 2010 1:00PM by Brent Archer
Filed under: Major Movement, Deals, Walgreen Co (WAG), CVS Corp (CVS), Options, Technical Analysis

Walgreen Co. (WAG - option chain) shares rose Friday after the company said it signed a new agreement with CVS Caremark (CVS) that will allow Walgreen to continue participating in CVS's pharmacy benefit management network. Financial terms of the deal were not disclosed. 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 WAG.

WAG opened at $31.01. In morning trading, the stock hit a low of $30.18 and a high of $31.38. As of 12:00, WAG was trading at $30.37 up 1.10 (3.8%). The chart for WAG looks bullish and S&P gives WAG a positive 4 STARS (out of 5) buy ranking.

For a bullish hedged play on this stock, I would consider an October bull-put credit spread below the $25 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 19.0% return in four months as long as WAG is above $25 at October expiration. Walgreen would have to fall by more than 17% before we would start to lose money.

WAG has not been below $27 at all in the past year and has shown support around $29 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 nor WAG.

Tags: CVS, CVS Caremark, deal, Investors Observer, options, WAG, Walgreen