How to Play a Down and Out Amgen, Inc. (AMGN) Stock

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Risk appetite soured Monday with profit-taking striking stocks across the board. While the selling was widespread, biotech stocks seem to have borne the brunt of the damage.

How to Play a Down and Out Amgen Stock

The iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) slipped briefly back below its 200-day moving average while such heavy hitters as Amgen, Inc. (NASDAQ:AMGN) and Celgene Corporation (NASDAQ:CELG) breached key support levels.

With the vultures circling, the time for bear plays in AMGN stock is at hand. As shown below, Amgen stock has recently stumbled back below its 50-day and 20-day moving averages.

The weakness has been sufficient in turning the 50-day (often viewed as the proxy for a stock’s intermediate-term trend) lower. With the path of least resistance now southbound, it’s entirely possible AMGN stock revisits the 200-day moving average in the $158 region over the coming days.

Consider that the next downside target.

AMGN
Click to Enlarge
Source: OptionsAnalytix

The spate of distribution days accompanying the ongoing rollover adds further insult to injury.

High-volume down days strike fear into the heart of shareholders on account of their bearish import. They typically suggest institutions are selling, which has a tendency to weigh on prices for a spell.

Monday’s downdraft completed and confirmed a bear flag pattern for AMGN by taking out the lower trendline of the recent consolidation pattern.

If you’re seeking short exposure in biotech, this stock is beckoning.

The Amgen Stock Trade

Implied volatility for Amgen stock options has climbed over the past month. Blame lies in part with the stock drop, but also the upcoming earnings announcement that has no doubt raised volatility expectations for the month ahead.

With the implied volatility rank now nestled a hair below the 50th percentile, AMGN options have officially become expensive. If you’re looking for a high probability route for profiting from the stock’s inability to rise significantly from here, bear call spreads are the way to go.

Sell the Nov $175/$180 call spread for 72 cent credit. The reward is limited to the initial 72 cents and will be captured if AMGN stock sits below $175 at expiration. The risk is limited to the distance between strikes minus the initial credit, or $4.28, and will be forfeited if Amgen pops above $180.

I suggest bailing if the stock rises to $175, however, to minimize losses.

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/2016/10/bears-strike-amgen-stock-amgn/.

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