Watson Pharmaceutical (WPI) Could Break Through $55.76 Resistance Level

Watson Pharmaceuticals Inc. (NYSE: WPI) closed Tuesday's trading session at $55.12. In the past year, the stock has hit a 52-week low of $39.34 and 52-week high of $57.52. Watson Pharmaceutical stock has been showing support around $54.58 and resistance in the $55.76 range. Technical indicators for the stock are Neutral and S&P gives WPI a positive 4 STARS (out of 5) buy rating. For a hedged play on this stock, look at the May '11 $55.00 covered call for a net debit in the $52.82 area. That is also the break-even stock price for this trade. This covered call has a duration of 59 days, provides 4.17% downside protection and an assigned return rate of 4.13% for an annualized return rate of 25.53% (for 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 WPI Jan '12 $35.00 call and selling the May '11 $55.00 call for a total debit of $18.40. The trade has a lifespan of 59 days and would provide 3.12% downside protection and an assigned return rate of 8.70% for an annualized return rate of 54% (for comparison purposes only). Watson Pharmaceutical does not pay dividends at this time.