Valeant Pharmaceuticals Intl Inc (NYSE:VRX) has had its fair share of headlines. The price swings have been huge and daunting enough to keep even seasoned traders out of this casino-like stock. Luckily, we’ve had profitable trades that paid without much trouble. It only makes sense to try and repeat performance.
Valeant Pharmaceutical still faces potentially scary events. But a large portion of forward expectations come have been priced in as evident by VRX stock’s fall from grace.
Since March, VRX has had a tangible range inside which it’s traded the secondary headlines.
Fundamentally, VRX still faces potentially many difficulties including debt issues and even legitimate concerns over the viability of its business model.
You’ve heard the rhetoric, you’ve seen the names on both sides of the VRX fence; the options market provides me with an opportunity to prove both sides wrong. I can sell risk against the extreme scenarios and let time do its job for me.
Trade #1: Sell the VRX Nov. 4 $23.50/$23 credit put spread. This is a bullish position for which I collect 12 cents per contract. This trade could yield 30% with about a 70% theoretical chance of success. Ideally, I need VRX to stay above my sold strike price to completely win. Usually I like to balance my trade with an opposing one — the hedge. Here is an optional hedge to this trade.
Trade #2 – Optional Hedge: Sell the VRX Nov. 4 $30.50/$31 credit call spread. This is a bearish position for which I collect an additional 13 cents per contract. This trade has the about the same metrics as the credit put spread. Ideally, I need VRX to stay below my sold strike price to completely win.
If I take on both trades, I would hold short an iron condor, reducing my risk. As a compromise I increase my ways of losing since I could lose on spikes and falls. But if successful, the iron condor could yield over 50% on money risked. This is an aggressive tight range for a wild stock like VRX; hence my chose for a relatively small dollars at risk with a 50 cent spread.
The twist here is that I want to bullishly skew this trade. To do this, I sell the VRX Oct 14 $23.50/$23 credit put spread. This is a bullish position for which I collect an additional 11 cents per contract. Taking this trade would make my iron condor lopsided and bullishly biased. This represents the market sentiment of late. Fear of missing out is in full force so I should fear a spike more than a crash.
Overall, I need VRX to stay above $23.50 but below $30.5 per share through Nov. 4 to complete win on both sides. This trade is likely to necessitate a certain level of intestinal fortitude.
These strikes leave me with a price buffer of 10% or more from current levels. I am not obliged to hold my trades through expiration and can close any of them for partial gains or losses.
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.
