Smithfield Foods Rises as Possible Takeover Target

Posted Jun 29th 2010 1:30PM by Brent Archer
Filed under: Major Movement, Deals, Good news, Rumors, Brazil, Smithfield Foods (SFD), Options, Technical Analysis

Smithfield Foods (SFD - option chain) shares are rising today as rumors have surfaced that the company may be an acquisition target for Brazilian meat titan JBS. 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 SFD.

SFD opened this morning at $15.60. So far today the stock has hit a low of $15.28 and a high of $16.20. As of 12:15, SFD is trading at $15.34 up 0.46 (3.1%). The chart for SFD looks neutral and S&P gives SFD a neutral 3 STARS (out of 5) hold ranking.

For a bullish hedged play on this stock, I would consider an August bull-put credit spread below the $13 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 two months as long as SFD is above $13 at August expiration. Smithfield would have to fall by more than 15% before we would start to lose money. Learn more about this type of trade here.

SFD has not been below $14 since November and has shown support around $14.85 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 SFD.

Tags: Brazil, deal, inthenews, Investors Observer, JBS, options, SFD, smithfield foods, takeover