Say Yes to Drugs with a Jazz Pharmaceuticals Credit Spread (JAZZ)

by John Kmiecik | September 20, 2013 9:00 am

My parents and teachers have always taught me to just say no to drugs. I think they meant well, but I don’t think they were talking about pharmaceutical companies specifically. Here is a trade idea where you might want to say yes to drugs.

Jazz Pharmaceuticals (JAZZ[1]): Put Credit Spread

The trade: Sell the October 80/85 Put Credit Spread (selling the October 85 put and buying the October 80 put) for $0.85 or better.

The strategy: The maximum potential profit for this trade is $0.85 if JAZZ is trading above $85 at October expiration. The maximum loss is $4.15 ($5 – 85 cents) if JAZZ is trading below $80 at October expiration. Breakeven is $84.15 at expiration based on a credit of $0.85.

Click to EnlargeThe rationale: Jazz is a pharmaceutical company that has been doing well over the last several months. The company announced earnings last month and it said its total revenues increased 68% in the second quarter as compared to last year. Their CEO also said that they continue to see record growth for two of their drugs; Xyrem and Erwinaze. Because of the increased sales, the company also increased their net sales guidance for 2013.

The stock has been slowly trending higher since the middle of April and has been constantly making new all-time highs. Will this trend continue? The answer to that question cannot be supplied until later but considering it has been constantly making higher pivot highs and lows for the most part in that time span, it stands a good chance. This put credit spread trade idea is created right at the previous pivot low of around $85. This area could act as support and keep the stock from moving lower in case it does decline. If the stock breaks and holds the $90 area, we all can sleep a little easier.

No positions held at the time of this writing. If you are interested in a free trial of my LIVE options trading room visit: http://markettaker.com/options_insider_trial/[2]

Source URL: https://investorplace.com/2013/09/say-yes-to-drugs-with-a-jazz-pharmaceuticals-credit-spread-jazz/

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