Whether it’s a bottom or the bottom isn’t certain. But if you want guarantees in this market, about the best you’re going to find is in Biogen Idec (BIIB).
We’ve got an iron-clad trade for BIIB stock with risk that’s 100% contained.
I’ll go right out and say it: If you’re foolish to trade a naked long or naked short stock in the current environment, particularly as a trader, than you probably will find yourself interested in a highflier like BIIB stock anyway.
Stunning and often counterintuitive price gaps have quickly become the new norm, not only for BIIB stock, but literally everywhere following a multimonth lull of near-historic proportions in the broader markets.
So what will Thursday bring in BIIB stock (and the market, for that matter) as traders go back and forth between their collective jeering then cheering of each additional market tinkering by China?
BIIB Stock Bearish Spread Strategy
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The provided daily view shows a couple channels and flag patterns that have sent Biogen into a downtrend. Following the last two sessions’ bounce reaction from an oversold condition, BIIB stock is now facing its first resistance area in the $300-$320 ballpark.
This price zone in BIIB stock holds both the $300 mark and the lows from the July bear flag pattern, as well as the prior, tight consolidation formed during August, which should act as resistance.
For traders inclined to see the situation as nothing more than a bear market rally, the BIIB Sep $320/$325 bear call spread might be considered. This trade is currently priced at $1.
Given fairly loose quotes in BIIB stock’s options and the current volatile environment, one strategy is to enter into strength (i.e., fade the move). But for God’s sake, be certain to use a limit order and be smart about it!
For instance, if BIIB stock (which closed at $298.25) were to trade higher by about 2% to $304, this spread should be worth $1.15. But as a fairly healthy 12,000 contracts changed hands Wednesday, traders may be able to use that investor interest to their advantage.
By fading strength into resistance within BIIB, downtrend there’s a better chance of another trader reaching to get long and a better fill of possibly $1.30 or $1.35 for this bearish vertical.
And of course, if BIIB is even higher we can expect a larger credit to be received on this Biogen spread as it could be worth as much as $5 at expiration. That means a trader using this spread has their risk contained to $5 minus the credit received for the spread—and regardless of where BIIB stock might be at expiration.
BIIB Stock Bullish Spread Strategy
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For bulls willing to take on a bit more risk but having more time on their side, the Jan $340/$365 spread fetches $5.40, but you can pay up to $6 given the monthly view and prospects for a partial retracement of BIIB stock’s recent losses.
The pricing allows this spread trader to maintain just 2% stock risk ($6/$298) while having a potential maximum return of over 315% if shares of BIIB stock move up by about 22% at January expiration.
Additionally, this BIIB stock bullish vertical gets the trader well past the seasonally weak month of September, October’s history of significant market lows and into the more seasonally bullish “best six months” period.
We’d personally still use a money stop or stop-loss tied to BIIB stock, but in case there are more undesirable gaps in our future, it’s nice to know you have a guaranteed out other than the closing bell.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
