King Pharmaceuticals (NYSE: KG - option chain) stock is falling today after the FDA said it cannot approve the company's abuse-resistant pain drug Remoxy, which it had developed with Pain Therapeutics (NASDAQ: PTIE). If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on KG.This morning, KG opened at $9.39. So far today the stock has hit a low of $8.89 and a high of $9.45. As of 11:30, KG is trading at $9.43, down $0.53 (-5.3%). The chart for KG looks neutral and S&P gives KG a 3 STARS (out of 5) hold ranking.
For a bearish hedged play on this stock, I would consider an April bear-call credit spread above the $12.50 range. A bear-call credit spread is an options position that combines the purchase and sale of call 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 13.6% return in four months as long as KG is below $12.50 at April expiration. King would have to rise by more than 58% before we would start to lose money.
KG hasn't been above $12.60 at all in the past year and shown resistance around $10.25 recently.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in KG or PTIE.
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