VRX Stock: A New Low for Valeant Pharmaceuticals Intl Inc

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Valeant Pharmaceuticals Intl Inc (VRX) is the poster child for volatility. The roller coaster ride in VRX stock is broadcasting a clear signal that only those with a high risk tolerance are welcome.

Valeant Pharmaceuticals Small Cap VRX

Headline risk, coupled with sharp bi-directional swings, has made VRX stock a tricky one to trade.

Fortunately, the options market provides more than a few ways to embrace the volatility, to profit from Valeant’s penchant for surprise.

Let’s take a quick look at its recent action, then analyze how traders might be able to structure a trade designed to thrive off the uncertainty.

Back-to-back earnings announcement failures have brought VRX stock low — to multiyear lows. At $25, it’s now 90% off its all-time highs seen a short nine months ago — a horrific descent in rapid-fire fashion if there ever was one.

Valeant is beneath all major moving averages, and it’s one banana peel away from yet another support break.

vrx stock chart
Click to Enlarge
Source: OptionsAnalytix

While the vultures are circling, some are holding out hope that a recovery is looming. Maybe the selling is overdone, maybe it’s not.

The nice thing about today’s trade idea is it doesn’t really matter either way. We just want VRX to keep rockin’.

VRX Stock Straddles for Volatility Lovers

Conventional investors should find it fascinating that the option market allows traders to sidestep the directional questions altogether. Derivatives allow opportunists to wager on volatility. One of the most popular bi-directional plays — one that will thrive if VRX plunges or rallies substantially from here — is the long straddle.

The position consists of buying an at-the-money call and put option. Provided the underlying stocks moves sufficiently, the trade will profit. The risk is the stock stays pat, causing straddle owners to lose a bit of money day-by-day in the form of time decay. To allow ample time for VRX stock to bust a big move in either direction, we’ll use October options.

Buy the Oct $25 call and Oct $25 put for $13. The max loss is $13 and will be incurred if Valeant Pharmaceuticals is perched at $25 at expiration. The max gain is unlimited to the upside but limited to $12 should VRX tumble to zero by expiration.

Be forewarned: The straddle is relatively expensive. The options market is essentially pricing in a range of $12 to $38 for the next five months.

If you think VRX stock has the mustard to rise toward the $40 zone or fall to $10 or less, snatch up the straddle. Otherwise, move on to greener pastures.

Personally, I’d bet on the former. Valeant is insane and has made many such moves in the past.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/05/vrx-stock-valeant-pharmaceuticals-intl-inc/.

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