Shares of Bristol-Myers Squibb Co (BMY) plunged nearly 16% following news of a late-stage trial failure of their blockbuster drug Opdivo for small-cell lung cancer treatment.
Given the nearly 16% drop in price and the loss of almost $20 billion in market cap in BMY, I think this was a classic overreaction. Friday’s failure sets up a great entry price to take a bullish stance in Bristol Myers stock.
While Opdivo was not approved for small-cell lung cancer treatment, it is important to remember that it has already been approved for other cancer treatments, such as melanoma and renal cell carcinoma with successful results.
Unlike small biotech firms that have their existence hanging on one drug, BMY has a vast arsenal of other drugs in addition to a robust research and development arm. While certainly a hit to the bottom line for BMY, it didn’t warrant a $20 billion hit.
The sharp drop in Bristol Myers stock price also had the effect of increasing the dividend yield to a more attractive 2.4%. With a payout ratio of only 57.6%, certainly the dividend for appears to be more than safe in BMY. This should attract some income investors at this level.
Technically, the stock is approaching some significant support at the $61 level. Bristol Myers stock made a classic head and shoulders bottom at the beginning of the year. Friday’s price action was encouraging, with shares failing to pierce this critical juncture and closing off the lows of the day
For a large-cap stock that dropped so sharply, the options players displayed only a modicum of concern. Implied volatility (IV) did rise, but its percentile stands at only 39%. This serves to confirm the level of comfort the big players have that BMY stock may be nearing a low.
With implied volatility still subdued in comparison to the recent move in Bristol Myers Squibb, I think a call diagonal spread makes the most sense on a risk/reward trade-off.
BMY Stock Trade Idea
Buy to open BMY August $63.50 calls and sell to open the BMY Aug 12 $65 calls for $1.05 or better.
The calls being bought are the regular monthly options that expire August 19 and the calls being sold are the weekly options that expire this Friday. The maximum risk on the trade is the premium paid or $105 per contract.
Ideally, BMY stock closes near the $65 strike price this Friday for maximum gain.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
