Filed under: Deals, Good news, Motorola (MOT), Options, Technical Analysis
Motorola Inc. (NYSE: MOT) shares soared at the open today, but are now trading only slightly higher after the company announced it plans to split itself into two publicly traded companies.
Under the plan, MOT’s handset business will become its own entity separate from the company’s home and networks business. The move comes after months of pressure from billionaire investor Carl Icahn, who thinks separating the handset business from other operations could help the company strengthen its mobile phone brand and bottom line. Pending regulatory approval, the company will be split in 2009. If you think that the company 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 MOT.
After hitting a one-year high of $19.68 in October, the stock hit a one-year low of $8.98 last week. MOT opened this morning at $10.30. So far this day the stock has hit a low of $9.82 and a high of $10.35. As of 10:00, MOT is trading at $9.81, up just $0.05 (0.5%), indicating that investors aren’t going crazy about this announcement. The chart for MOT looks bearish and steady, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bullish hedged play on this stock, I would think about a July bull-put credit spread below the $8 range. A bull-put credit spread is an options position that combines the buy 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 12.5% return in just 4 months as long as MOT is above $8 at July expiration. Motorola would have to fall by more than 18% before we would begin to lose money.
MOT hasn’t been below $8.90 at all in the past year and has shown support around $9.30 recently. This trade could be risky if the company’s earnings (due out in late April) disappoint, but even if that happens, this position could be protected by the support the stock might find around $9, where it bottomed out over the past month.
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 MOT.
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