Positive catalysts abound and put Celgene (CELG) on the radar for higher prices in 2016. For options traders, a well-placed bullish vertical in CELG is a smart way to cash in.
Last year was a good year for Celgene shareholders who enjoyed a return of about 7% compared to the S&P 500’s decline of 0.7%. This year could prove even stronger.
The recent settlement involving Celgene’s blockbuster blood (myeloma) cancer drug Revlimid provides substantial support going forward, as the product is responsible for 60% of its revenue.
According to analysts at Baird, the resolution allows for “better clarity on the duration of its (Revlimid) life cycle” — a major benefit for CELG going forward.
The firm also believes the aforementioned settlement was “incrementally more favorable than many expected,” and Baird set a price target of $162 on CELG stock.
And Celgene isn’t a one-trick biotech pony either.
While Revlimid has long been the company’s revenue “workhorse” (and the drug’s expanded use won’t hurt that case), Celgene also holds other top-selling drugs such as its anti-inflammatory pill Otezla and lung cancer drug Abraxane.
CELG also stands to benefit from last year’s acquisition of Receptos and its multiple sclerosis treatment ozanimod. Couple that with a stable of potential pipeline blockbusters and Celgene could produce sales growth of 20%-plus for the foreseeable future.
CELG Daily Stock Chart
On the technical side of the picture, the daily chart of CELG isn’t perfect: Shares are testing resistance from a downtrend line and forming a possible second lower high dating back to Celgene’s failed breakout attempt in July.
Click to Enlarge
So what has our attention?
First, following Celgene’s unsuccessful breakout, a hard corrective move during August pushed the stock below the prior base low, which reset the weekly base count. Base count resets like the one in CELG are important as the price action effectively cleanses the stock of weaker hands and excessive bullishness.
Second, the current tight consolidation in Celgene stock is forming up against the 62% Fibonacci resistance level from Celgene’s July all-time-highs to its August corrective low.
If resistance is cleared, there’s an increased chance for a breakout to all-time-highs as shares have the support of a sturdier first-stage base in Celgene stock that’s about five months in duration.
CELG Bull Call Spread
Given our view, Celgene will see fresh all-time-highs, but respecting shares must first move above immediate resistance. I like the Feb $125/$130 bull call spread if it trades through $122.15.
The cost to enter the vertical is estimated at $1.75 per spread compared to its cost of about $1.50 with shares at $119.84 at the time of writing.
Our thought process for using the $122.15 level to initiate a vertical position is that the price increase should produce continued upward momentum while avoiding getting a random whipsaw against technical resistance.
By paying $1.75 for this bullish spread, the trader creates a risk-to-reward ratio of 1.85-to-1, or max profit of $3.25 with shares above $130 and 8.5% higher than current levels.
Another benefit: A vertical spread has the advantage of reducing unwanted options risks like time decay and exposure to volatility.
Lastly, the use of the CELG February contract should put the spread within range to participate in Celgene’s next earnings announcement, though an exact date hasn’t been confirmed.
While earnings could quickly maximize profits, at the end of the day it’s nice to appreciate the safety of this position should a less favorable reaction occur.
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.
