Cephalon Inc. (NASDAQ: CEPH) shares are trading higher today on news that Takeda Pharmaceutical, a Japanese firm, has agreed to buy Cephalon competitor Millennium Pharmaceuticals (NASDAQ: MLNM) for $25 a share. MLNM is trading up almost 50% to $24.45 currently, indicating that investors think this deal will most likely happen. 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 CEPH.

After hitting a one-year high of $84.83 in June, the stock hit a one-year low of $56.20 in February. CEPH opened this morning at $64.94. So far today the stock has hit a low of $64.45 and a high of $66.18. As of 12:45, CEPH is trading at $65.27, up 1.05 (1.6%). The chart for CEPH is neutral and improving, while S&P gives the stock a bullish 4 Stars (out of 5) buy rating.

For a bullish hedged play on this stock, I would consider a May bull-put credit spread below the $55 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 7.5% return in just five weeks as long as CEPH is above $55 at May expiration. Cephalon would have to fall by more than 15% before we would start to lose money. Learn more about this type of trade here.

CEPH hasn't been below $56 at all in the past year and has shown support around $59 recently. This trade could be risky if the company's earnings (due out on 5/1) disappoint, but even if that happens, that position could be protected by support the stock might find between $55 and $60, where it bottomed out in the past two months.

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 CEPH or MLNM.

Yesterday, I met up with a health care venture capitalist. He mentioned that M&A is likely to be a big factor over the next few years. After all, major pharma companies will have a variety of their blockbuster drugs go off-patent.

Well, interestingly enough, we got a mega-deal today; that is, Takeda Pharmaceuticals (the top drug company in Japan) has agreed to pay $8.8 billion for Millennium Pharmaceuticals (NASDAQ: MLNM), which develops biopharmaceuticals for such things as cancer and inflammatory diseases (its top drug is Velcade). There is also a key strategic relationship with Johnson & Johnson (NYSE: JNJ).

No doubt, the Millennium deal is fairly rich – with a valuation at 17 times revenues. Then again, Millennium is growing quickly and has a promising stable of drugs. And as for Takeda, it has two major drugs -- Prevacid and Actos – that will come off-patent in 2009 and 2011. In other words, the company has really no other option but to pay up on deals.

In today's trading, Millennium's stock price is up 49.72% to $24.48.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates MergerBook.com.

Monday, December 31

• PDUFA date for Pharmacyclics (NASDAQ: PCYC)' Xcytrin for treatment of non-small cell lung cancer patients with brain metastases.

Tuesday, January 1

• Markets closed for New Year's holiday.

Wednesday, January 2

• PDUFA date for SkyePharmaceuticals (OTC: SKYEY) and Sciele Pharmaceuticals (NASDAQ: SCRX) Sular Formulation for Hypertension. The FDA extended the PDUFA Date from November 2, 2007.

Thursday, January 3

• Ford Motor Company (NYSE: F) to report monthly sales at 1pm
• General Motors (NYSE: GM) to report monthly sales at 2pm.
• AngioDynamics (NASDAQ: ANGO) to report Q2 earnings; conference call at 4:30pm.

Friday, January 4

• Millennium Pharmaceuticals (NASDAQ: MLNM) to provide guidance at 8am.
• Checkpoint Systems (NYSE: CKP) to provide guidance at 10am.
• Federal Reserve Govenor Kohn to provide keynote speech at the AEA Annual Meeting in New Orleans at 11:45am.

Each year Steven Halpern, editor of TheStockAdvisors.com, surveys the leading financial newsletter advisors asking for their favorite stocks for the coming year. This article is part of his 24th annual Top Picks Report.

Millennium Pharmaceuticals (NASDAQ: MLNM) is the top speculative idea for 2007 from Ryan Detrick, editor of Players Performer. He says, "Millennium is one of the top performing stocks in the biotechnology field, as the equity has gained more than 44% since May 2006.

"The Cambridge, Massachusetts-based firm focuses on treatments for cancer and inflammatory diseases. The company also has drugs in the pipeline for multiple sclerosis, Crohn's disease, and various cancers. The biotech sector as a whole is positioned very nicely for a move higher.

"The overwhelming sentiment from investors toward this technical outperformer is one of doubt and skepticism, which parlays perfectly into a contrarian outlook. Specifically, heavy skepticism levied against a stock that is attractive from a technical perspective, not to mention a security from a solidly performing sector as a whole, suggests that there is ample sideline money to help usher the shares even higher.