Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is looking more promising on and off the price chart these days. Nevertheless, this strategist maintains the right prescription for positioning in VRX is still a bull put spread. Let me explain.
It’s been three months to the day since I wrote about embattled Valeant. In the face of a bearish, but deeply priced-in, earnings reaction, a defensive out-of-the-money vertical looked approachable.
The analysis was slightly off. But despite ensuing bearish volatility, a decent-size credit of 70 cents and return of nearly 39% was captured with the contrarian position.
Over the course of the summer, VRX has continued to slowly remove itself from its scandalous and shady accounting missteps and allow for a successful turnaround play to emerge. Okay, maybe.
Last month and despite an announced profit miss of 19 cents on earnings of $1.40, VRX stock surged some 25%. Were traders happy with the miss, implying less massaging of the company books? Maybe.
Was the Valeant report less bad than bearish shorts hoped, as full-year guidance was maintained? Maybe.
At the end of the day, Valeant remains a complex battleground stock with bulls and bears taking daily swipes at one another — and VRX stock, still better-suited for an out-of-the-money vertical.
VRX Stock Daily Chart
Since our last article when our incorrect or “early” annotation of “and now -14.77% looks less bad …” was actionable, shares of VRX have begun to form a series of higher highs and lows. On the surface, the channel pattern looks bullish.
Additionally, the last five months of price action appears to be taking the shape of an inverse and bottoming head-and-shoulders or saucer formation. The confirmation pattern(s) supports the idea of higher prices for Valeant shareholders.
So, how high will it go? Actually, I’m more curious as to how low Valeant shares might go without the current situation failing technically.
It’s my view that given still heavy short interest of around 13% and probably too many investors hoping for an easy rebound, VRX is still better for positioning with an eye on buying weakness and /or collecting income with a bull put spread.
Valeant Bull Put Spread
In reviewing the Valeant options board and shares at $30.20, the out-of-the-money Oct $27.50 / $25 bull put spread is attractive.
Priced for 69 cents, the full credit is captured if VRX stock isn’t lower than 8.9% at expiration and below the sold $27.50 strike. At the same time, this bullishly constrained strategist has another 2% margin of safety with a breakeven of $26.81.
In the event Valeant does fall prey to bears or fleeing bulls, the vertical’s max risk is contained to a loss of $1.81 situated at 50-day simple moving average support.
Bottom line, whether the latter technical line of defense in VRX stock holds or not isn’t known for certain. But a generous credit and limited risk strategy certainly makes for a more interesting bullish proposition for investors at this point in time.
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.
