BJ's Wholesale Exploring Buyout Possibilites

Posted Mar 22nd 2011 2:00PM by Brent Archer
Filed under: Major Movement, Deals, Options, Technical Analysis

BJ's Wholesale club (BJ - option chain) shares rose Tuesday on news that private-equity firm Leonard Green & Partners has signed a confidentiality agreement with BJ's to discuss a possible buyout. 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 BJ.

The stock opened Tuesday morning at $48.20. In morning trading, the stock hit a low of $47.14 and a high of $48.73. As of 12:15, BJ was trading at $48.55 up 2.03 (4.4%). The chart for BJ looks bullish and S&P gives BJ a positive 4 STARS (out of 5) buy ranking.

For a bullish hedged play on this stock, I would consider a June bull-put credit spread below the $40 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 three months as long as BJ is above $40 at June expiration. BJs would have to fall by more than 17% before we would start to lose money.

BJ has not been below $40 since June of last year and has shown support around $46 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 BJ.

Tags: BJ, BJs Wholesale, buyout, inthenews, Investors Observer, options