The market has been looking little tentative as of late. Suddenly, the bullish outlook that many traders might have had before this week started is looking a bit shaky. So, here is a trade idea on a strong stock — Celgene (CELG) — that still can profit even if the market or stock fails to move higher.
Celgene (CELG — $166.05): Put Credit Spread
The trade: Sell the CELG Dec 155/160 Put Credit Spread (selling the Dec 160 put and buying the Dec 155 put) for 60 cents or better.
The strategy: The maximum potential profit for this trade is 60 cents if CELG stock is trading above $160 at December expiration. The maximum loss is $4.40 ($5 – $0.60) if CELG is trading below $155 at expiration. Breakeven is $159.40 at expiration based on a credit of 60 cents.
The rationale: Celgene is a pharmaceutical company that concentrates on creating drugs that treat blood cancers. Apparently, a couple of analysts have had some good things to say about the company and CELG stock recently.
UBS upgraded the stock to a “buy” from a “neutral” rating and gave it a $200 price target. The bank also raised its 2014 and 2015 earnings estimates from previous forecasts.
Not to be outdone, Credit Suisse just recently upgraded CELG stock too. It raised Celgene to “outperform” from “neutral” and raised its 2017 total sales and earnings per share. They see the continued growth of their most popular drugs like Revlimid, Pomalyst and Abraxane as the contributing factor.
If the banks are showing some love to CELG stock, maybe you should too.
Click to Enlarge Despite the adulations by the banks, this trade idea’s success is firmly rooted in what we are seeing in the charts. Since the upgrades, CELG stock shot up to almost $174. It has pulled back in the past few sessions, but it has potential support right around $165 from the last pivot (significant) high at the end of November. The previous pivot high before that came in late October and took place around $160.
CELG stock has two potential areas of support above and at the sold strike, giving this trade a good chance to profit barring a dramatic decline. The implied volatility of the options is slightly elevated, which benefits the sellers of options like in this trade idea.
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities. Get a free trial of John’s live options trading room here.