Filed under: Good news, Options, Technical Analysis

Phillip Morris International (NYSE: PM - option chain) shares are relatively flat today in the face of a bearish market as the company announced it will raise its regular quarterly dividend to 54 cents. As long as they pay that dividend quarterly, then this makes a tidy 4% yield.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 PM that can take advantage of that dividend.

PM opened this morning at $53.76. So far today the stock has hit a low of $53.66 and a high of $54.46. As of 12:35, PM is trading at $53.96, up 4 cents(0.1%). The chart for PM looks bullish and S&P gives PM a positive 4 STARS (out of 5) buy ranking.

For a bullish hedged play on this stock, I would consider a March covered call at the $60 level. A covered call is an options position that combines the purchase of stock with the 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 an 8.4% return in 7 months if PM is above $60 at March expiration. But unlike our normal credit spread trades, that is not the goal here. This position turns out strictly better than buying and holding the stock if it is below $61.25 at March expiration, and it makes a reasonable return in the unlikely event that the stock rises to that level. Plus, you can probably expect to catch at least two dividend payments over that time. We get about 2% of downside protection on this pretty stable stock by using a covered call. Learn more about this type of trade here.

PM has shown support just below $54 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 PM.

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This entry was posted on Tuesday, September 2nd, 2008 at 10:18 am and is filed under Stocks Money News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.