Traders looking to profit with defined risk and solid return on investment characteristics should look no further than Amgen (AMGN) and an Amgen stock bear put spread.
Over the last couple of years, a large cap biotech like Amgen stock or peers such as Celgene (CELG) and Gilead (GILD) could seemingly do no wrong by investors as the sector led the charge in the broader market to all-time highs.
In the past couple months, though, more and more technical wear and tear has shown up on the price charts in many of these recent Wall Street darlings. Amgen stock is no exception. We’re confident AMGN is presenting bearish traders with some solid downside from current levels.
Amgen Stock Daily Chart
The daily chart of Amgen stock shows a large price consolidation which developed during most of 2015. The price action follows a two-year rally following a breakout of AMGN’s prior best of $86.92 set back in 2005.
The stall at a near perfect double in price shouldn’t be too surprising, especially given the broader market’s own and similar price action. But Amgen stock’s technical leadership was called into question when a late July breakout attempt quickly failed in early August.
Some may see Amgen stock’s failed breakout as poor timing, considering the broader market hadn’t yet broken out. The problem with this argument is it typically takes sector and stock leadership to move first and lead the market to new highs … not the other way around.
In this situation, Amgen stock tried to retain its leadership status, but failed. In the process, the action hinted at even weaker prices and possibly a full-fledged change of trend.
As for the most recent sign of trouble, shares of AMGN have been even weaker than the broader market. Since the August 24 “mini flash crash,” Amgen stock has been consolidating in lower third of its correction compared to the S&P 500’s (SPY) 38% – 62% retracement.
Lastly, Amgen stock is closing in on a bearish Death Cross signal and currently showing signs of overbought exhaustion based on its daily chart stochastics.
Amgen Stock Bear Put Spread
Implieds have pulled in off extreme readings, and volatility remains firm. Given September’s reputation for bearish behavior, the argument for an outright long put purchase can’t be dismissed. As a market strategist though, I prefer a long bear put vertical.
The use of an Amgen stock vertical for positioning allows the trader to reduce volatility risk, which could see a big drop after this week’s FOMC Decision as a rather big uncertainty is removed from the market.
And speaking of the Fed, while you might see lower prices in store for Amgen stock, how investors react following policymakers decision on interest rates isn’t known. A bullish reaction could easily crush bearish positions in a “mini flash bash” celebration.
The potentially volatile aftermath of the Fed makes defensive positioning like found in a bear vertical spread a smart option. And should the ensuing volatility prove to be bearish on the Amgen stock price chart, this AMGN bear will be nicely rewarded.
With shares of AMGN closing at $150.52 on Monday, the Weeklies Oct. 23 $150 / $142 put spread for $2.75 or cheaper is attractive.
The pricing of this Amgen stock spread is less than half the premium it would cost for an outright $150 put. At the same time, this vertical allows for a maximum return of nearly 200% below $142 where the spread would expand to $8 and a profit of $5.25 at expiration.
In our professional opinion, a vertical like this one in Amgen stock goes a long ways towards helping bears remain healthier regardless of the market’s prognosis from investors later this week.
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
