Walgreen Co (NYSE: WAG - option chain) shares are rising today after the company withdrew its buyout bid for Long's Drug Stores (NYSE: LDG). This clears the way for CVS Caremark (NYSE: CVS) to complete its $2.7 billion buyout offer of LDG, which was a smaller offer than that of Walgreen.

It seems that investors approve of this action, since WAG is up a nice chunk today. 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 this morning at $26.89. So far today the stock has hit a low of $26.44and a high of $27.27. As of 12:30, WAG is trading at $26.80, up 62 cents (2.3%). The chart for WAG looks bearish and S&P gives WAG a 3 STARS (out of 5) hold ranking.

For a bullish hedged play on this stock, I would consider a November bull-put credit spread below the $25 range.

Walgreen (NYSE: WAG), a drugstore chain which competes with CVS Caremark (NYSE: CVS) and Rite Aid (NYSE: RAD), dropped the ball in the fourth quarter, at least as far as analyst estimates are concerned. On a GAAP basis, Walgreen increased its earnings per share by a nickel, coming in at 45 cents.

That would be pretty cool if there were no adjustments to be made. Unfortunately, there is one. It relates to an adjustment for vacation-time accrual, which added almost $80 million to the bottom line. Take that away, and you get no earnings growth, as earnings per share would have been 40 cents, meaning non-GAAP number missed expectations by 5 cents.

I think Walgreen is a strong brand in its space. However, with the economic meltdown continuing its dire course, I would imagine that the chain is going to become affected by it, strong brand or not. Drug prescriptions certainly might be considered a defensive element in such an environment, but keep in mind that Walgreen doesn't just make its money on prescription sales. It sells a whole host of items in every location. And I'd have to imagine that the consumer is going to be scaling back. Yep, get ready for the good ole negative wealth effect.

CVS Caremark (NYSE: CVS) announced the acquisition Longs Drug Stores (NYSE: LDG) for $71.50 per share in cash. LDG closed at $54.04.

Pershing Square filed a 13D on August 5 indicating an ownership of 8.8% of LDG. LDG was expected to report Q2 EPS in mid-August.

LDG option volume was heavy over the last seven trading days. LDG August 55 straddle closed at $2.55, September 55 straddle was at $7.30. LDG September option implied volatility of 51 is above its 26-week average of 43 according to Track Data, suggesting larger price movement.

CVS closed at $38.05. Jefferies says: "We believe CVS/Caremark's unique competitive position; substantial revenue/EPS upside opportunity, and still modest valuation should lead to significant equity appreciation."

CVS September option implied volatility of 28 is near its 26-week average according to Track Data, suggesting non-directional price movement.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

MOST NOTEWORTHY: Total Systems, Capital Products Partners and Ashford Hospitality were today's noteworthy initiations:

• Stephens initiated Total Systems (NYSE: TSS) with an Overweight rating and $28 target. The firm thinks investor concerns about the negative impact of economic weakness are overdone.
  
• JP Morgan believes Capital Products' (NASDAQ: CPLP) fixed-rate contract coverage and fixed operating costs should provide stable cash distributions to unit holders. The firm assumed coverage with an Overweight rating.
  
• Ashford Hospitality (NYSE: AHT) was initiated at UBS with a Buy rating and $7 target.

OTHER INITIATIONS:

• Bank of Kentucky (OTC: BKYF) was initiated with an Outperform rating and $29 target at Baird.
  
• Morgan Stanley initiated Longs Drug Stores (NYSE: LDG) with an Equal Weight rating.

There is a Walnut Creek, California drug store chain that says it operates on the basis of "treating others as we, ourselves, would like to be treated." From its exacting governance policies to its network of wellness centers and health screening programs, it appears the outfit means business.

Longs Drug Stores Corp.(NYSE:LDG) provides retail drug and pharmacy benefit services. The Retail Drug Stores unit offers prescription drugs and general merchandise. It also operates a mail order pharmacy business and provides various health screening services. The Pharmacy Benefit Services division offers benefit management to third party health plans and prescription drug plans to Medicare participants in 35 states. The firm operates just over 500 drug stores in California, Hawaii, Nevada, Washington, Colorado and Oregon. Its prescription benefit plans cover approximately 5.9 million clients.

Longs pleased investors late last month, when it reported Q4 EPS of 81 cents and revenues of $1.34 billion. Analysts had been looking for 74 cents and $1.34 billion. Management also guided Q1 EPS to 47-52 cents (46 cent consensus), FY08 EPS to $2.40-$2.50 ($2.21 consensus) and FY08 revenues to $5.35-$5.45 billion ($5.41B consensus). The stock popped into a bullish "pennant" consolidation pattern on the news. Stocks frequently exit pennants moving in the same direction they were traveling when they entered them. In this case, that would be to the upside.

Brokers recommend the shares with one "strong buy," five "holds" and three "sells." Analysts see a 19% average annual growth rate, through the next five years. The stock's Price to Sales ratio (0.38), Price to Book ratio (2.34) and Price to Cash Flow ratio (11.79) compare favorably with industry, sector and S&P 500 averages. Institutional investors hold about 78% of the outstanding shares. The stock is one of those used to calculate the S&P 600 SmallCap Index. Over the past 52 weeks, it has traded between $38.76 and $52.98. A stop-loss of $44.50 looks good here.

Larry Schutts is a contributing editor for Theflyonthewall.com and the Vice-President of Stockwinners.com.