After a nearly 10-for-1 price cut in Valeant Pharmaceuticals Intl Inc (NYSE:VRX) stock, shares have recently settled in a trough in the low $20s. VRX stock is far from its $263 per share highs, but it still attracts buyers on the slightest bit of good news.
Click to Enlarge My last effort at going long VRX stock was a nice and easy win. Today, I want to set a new bullish trade for a separate account where I need some healthcare exposure.
Fundamentally, I am confident enough that there is value for Valeant’s business model. Technically, VRX’s chart yields very few clues. So I am left with the price ranges we’ve seen so far and must sell against levels that seem dependable.
I usually don’t like to go long a stock on a big up day. Today, Valeant stock is up 6% on an upgrade. In this case, though, I’m looking to stay around for months. So timing a good entry isn’t as crucial as it would be for a shorter-term trade.
Going Long VRX Stock
The thesis is simple for this bullish trade: The worst for VRX stock is behind us. To execute this idea, I will resort to the options markets. I like to use options to go long on Valeant with a healthy cushion. I rarely set a trade without a healthy buffer, and you shouldn’t either. Leave room for error.
Trade No. 1: Sell the VRX Mar 2017 $15 put for $1.60 per contract. Ideally, I need VRX to stay above $15 per share through March 2017. My breakeven point would be $13.40 per share. While I am holding the trade open, I would be assigned the stock at $15 per share if VRX falls below my strike price.
I am not obliged to hold the trade through to expiration. I can close it at any time for partial gains or losses. Statistically, this trade has an 80% theoretical chance of success.
Trade N0. 2 (Optional Element): Someone that sees more upside potential could add another layer to the trade to capture more potential profits. The setup for this part is a straightforward debit call spread. Set enough time on the clock to be proven right. An example: Buy the VRX Jan $27.50/$30 debit call spread for $1. I stand to double my money if VRX stock rises through both legs by mid-January.
Don’t sell naked puts unless you’re willing and able to own the stock at the strike price sold. Also, never risk more than you’re willing to lose. In this case, I need some relatively speculative risk in this account. VRX offers me a good balance of speculation and decent fundamentals.
Usually, selling risk in a low-vol environment isn’t lucrative. But in this case, the headline risk potential in VRX stock keeps premiums relatively elevated.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and StockTwits at @racernic.
