mrk

Merck & Co. Inc. (NYSE: MRK) announced on Sunday that Gardasil, its vaccine for preventing cervical cancer, may offer protection for women up to age 45. The vaccine is approved for use in girls and women ages 9 to 26, but Merck is seeking FDA approval to expand its use to older women. Even though Merck's vaccine has been shown to decrease the chances of developing cervical cancer by up to two-thirds, the drug has found opponents who balk at vaccinating their daughters against HPV, which is generally a sexually transmitted disease. However, expanding the market to older women could take the focus off that issue as well as increase Merck's market at the same time. 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 MRK.

The stock has hit a one-year high of $58.36 this month after hitting a one-year low of 42.29 last November. MRK opened this morning at $55.00. So far today the stock has hit a low of $55.00 and a high of $56.85. As of 10:50, MRK is trading at $56.63, up $0.59 (1.1%). The chart for MRK looks bullish and steady, while S&P gives the stock a 4 STARS (out of 5) buy rating.

For a bullish hedged play on this stock, I would consider a January bull-put credit spread below the $47.50 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. This particular trade will make a 4.2% return in just 3 months as long as MRK is above $47.50 at January expiration. Merck would have to fall by more than 16% before we would start to lose money.

MRK hasn't been below $47.50 at all since April and has shown support around $53 recently. This trade could be risky if the company's drugs in development run afoul of the FDA, but even if that happens, this position could be protected by strong support it has found around $50 over the past six months, plus the stock's 200 day moving average, which is currently around $49 and rising.

Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: At publication time, Brent neither controls a bullish hedged position in MRK.