Global biotechnology giant Amgen (AMGN) is slated to release its third-quarter earnings report after the close of trading tomorrow night, but the company is already facing considerable volatility even before the numbers hit the Street. In fact, Amgen stock has jumped more than 11% this week after hedge fund firm Third Point suggested the company split in two.
The question now is, “Is there any fuel left in the tank for a post-earnings rally?”
For the record, Wall Street is expecting a profit of $2.06 per share from AMGN, but whispers among the analyst community indicate that earnings could come in as high as $2.16 per share, according to EarningsWhisper.com. An earnings beat wouldn’t be out of character for Amgen, as the company has topped Wall Street’s expectations in each of the past four quarters.
Despite this solid fundamental track record, the brokerage community is split on Amgen’s future. According to data from Thomson/First Call, AMGN has attracted 12 “buy” ratings and 12 “hold” ratings. What’s more, the 12-month consensus price target of $148 represents a premium of only 3.5% to yesterday’s close at $143.64. In other words, there is ample room for potential upgrades or price-target increases on any company split or earnings news.
Turning toward options data, we find that speculative short-term traders are quite bullish on Amgen stock. For example, the put/call open interest ratio for the weekly Oct. 31 series of options arrives at 0.69, as calls easily outnumber puts among options set to expire at the end of next week. Looking ahead, this reading falls to 0.48 for the November series of options.
Peak call open interest totals 4,097 contracts at the Nov $144 strike, with another 2,100 call contracts open at the in-the-money Nov $140 strike and the out-of-the-money Nov $145 strike. On the put side, the Nov $135 strike is tops with 1,086 contracts, followed closely by the deep out-of-the-money Nov $85 strike with 1,050 contracts.
Click to Enlarge Overall, implieds for weekly Oct. 31 options are pricing in a potential post earnings move of about 6.6%. This places the upper bound at $152.45, while the lower bound lies at $133.55. Technically, a rally to $152 would place Amgen stock in all-time high territory, while a move to $133 leaves AMGN well above technical support at $127.
2 Options Trades on Amgen Stock
AMGN Bull Call Spreads: Those traders looking for Amgen stock to extend this week’s rally might want to consider a Nov $143/$152 bull call spread. At last check, this spread was offered at $2.55, or $255 per pair of contracts. Breakeven lies at $145.55, while a maximum profit of $6.45 is possible if AMGN closes at or above $152 when November options expire.
Selling AMGN Puts: Alternately, if you’re worried about AMGN’s upside while split rumors are circulating, but you think the stock will hold up over the short-term, you might consider selling a weekly Oct $127 put. This option expires at the end of the week, and is positioned to take advantage of support at $127. At last check, the weekly Oct $127 put was bid at 23 cents, or $23 per contract. On the upside, this put sell strategy allows you to keep the premium as long as Amgen stock closes above $127 when October options expire. The downside is that should AMGN trade below $127 before expiration, you could be assigned 100 shares for each put sold at a cost of $127 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
