Not all biotech stocks have been soaring over the past year. Some, like Gilead Sciences, Inc. (NASDAQ:GILD), have spent the past eight months on a circuitous route to nowhere.
At $100, GILD sits at the same price level as last August.
While it has had some wild rips and dips in the interim, the century mark has acted as a gravity well, sucking Gilead stock back each time it has tried to venture too far away.
If recent patterns are any indication, however, I suspect GILD stock has finally mustered up the strength to detach from the $100 zone – for good this time.
The dominant price pattern influencing Gilead Sciences all these months is a symmetrical triangle. Formed by a series of lower pivot highs and higher pivot lows, this neutral triangle pattern reflects a prolonged period of volatility compression.
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As Gilead stock approaches the apex of the triangle, the odds of a breakout — or volatility expansion — increase. While a volatility surge is all but assured, the direction of the move remains elusive.
Luckily, we have a unique way for playing the coming resolution. It’s a little complicated, but it could be well worth your while.
Go Bi-Directional With GILD Straddles
Those unwilling to pick a direction but wanting to profit from a big move in GILD could buy a straddle. The long straddle is a bi-directional, long volatility strategy consisting of buying an at-the-money call and put simultaneously.
With GILD perched near $100 you could buy the May 100 straddle for $9.00. The max risk is limited to the initial $9.00 debit and will be lost if GILD remains at $100 through May expiration. Should the stock undergo a large rally or decline, however, the straddle is positioned to profit.
To get a sense of how far Gilead stock needs to move by May expiration we can look at the upper and lower break-even points for the straddle. By simply adding and subtracting $9 from the straddle strike price of $100 we can identify the break-evens of $91 and $109.
If $91 and $109 seem a long ways away, bear in mind GILD reports earnings on April 21, so the May options are pumped up a bit in anticipation of that event.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
