Reynolds American (RAI) 11/18/09 PriceWatch Alert Up To 4.60% Downside Protection

Posted: Wednesday, November 18, 2009 8:15 AM EDT
By: Market Intelligence Center Staff

Reynolds American (NYSE: RAI) closed yesterday at $51.08. So far the stock has hit a 52-week low of $31.55 and 52-week high of $51.36. Reynolds American stock has been showing support around 50.47 and resistance in the 51.51 range. Technical indicators for the stock are Bullish and S&P gives RAI a positive 4 STAR (out of 5) buy rating. RAI appears on the Investors Observer Hedged Dividend Income list. For a hedged play on this stock, look at a Feb '10 50 covered call (RAI BJ) for a net debit in the $48.73 area. That is also the break even stock price for this trade. This covered call has a 94 day duration, provides 4.60% downside protection and a 2.61% assigned return rate for a 10.12% annualized return rate (comparison purposes only). A lower cost hedged play for this stock would use a longer term call option in place of the covered call stock purchase. To use this strategy look at going long the RAI Jan '11 40 Call (OWO AH) and selling the Feb '10 50 call (RAI BJ) for an $8.85 debit. The trade has a 94 day life and would provide 4.37% downside protection and a 12.99% assigned return rate for a 50.00% annualized return rate (for comparison purposes only). Reynolds American has a current annual dividend yield of 6.76%. [WBA-Seven Summits Research]