If the market is always right, it may finally be time for a different sort of bullish pairs trade in Biogen Inc (NASDAQ:BIIB) and Celgene Corporation (NASDAQ:CELG). Let me explain.
Tuesday presented market bulls with an ignominious start to the seasonally jolly “Best Six Months.” For its part, the S&P 500 Index swooned to its worst finish in nearly four months. The price action went from bad to worse as the index also broke multiple technical support levels.
But that wasn’t the case for BIIB or CELG. Despite trumped up election-driven concerns over the past month tied to aggressive healthcare drug pricing, shares of Biogen and Celgene were conspicuously up 0.82% and 1.79%, respectively, on the session. Could those political uncertainties now be priced in, given the aggressive discounting in biotech? It’s our view, and it’s a good bet irrespective of who lands in the White House.
Less noticeably, Tuesday’s bullish price action could have a lot to do with recent, solid all-around profit reports from both Biogen and Celgene, which fly in face of the broader market’s own earnings recession. Having said that, let’s review both BIIB and CELG on and off the price chart and offer up a couple bullish spreads now that the worst is likely over for these two biotech standouts.
Bullish Pairing #1: Biogen Inc (BIIB)
Last week’s upside earnings surprise in BIIB confirmed there’s still value and growth in this biotech blue chip. A 4% profit beat on earnings of $5.19 per share also revealed better-than-expected revenue growth of 6% attributed to Biogen’s lineup of market dominating multiple sclerosis drugs.
In recent months, Biogen also benefitted from reports that the company is looking to sell itself. Merck & Co., Inc. (NYSE:MRK) and Allergan plc Ordinary Shares (NYSE:AGN) have cropped up as possible suitors. The speculation should help maintain a floor for BIIB shares.
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With the most recent price action taking BIIB down into a testing position of Fibonacci support and the 200-day simple moving average, as well as its lower Bollinger band and channel line, there looks to be solid technical support for shares to resume their bullish trend.
Also, with BIIB shares down about 8.3% in 2016 and more than 40% from its 2015 high, this looks like a nice spot to pick up both value and growth in Biogen as a shareholder.
BIIB Trade Idea
Reviewing the Biogen options board, and based on slightly worse-than-mid-market pricing, I like the idea of a partially hedged long stock position in BIIB using the Dec $260/$230 bear put spread and selling the Dec $320 call.
The net spread position affords the trader a bit of protection down to $230 for no extra cost compared to simply buying BIIB at $282.50. The real cost with this variation on a collar is the upside is initially capped at $320.
Bottom line, a return of 13% in less than two months if BIIB rallied to $320 would be nice. Additionally, as the cap is near estimated deal levels of $75 billion and helps cover the cost of protection in the event Mr. Market has other plans in store for Biogen, the strategy offers a nice blend of value and growth.
Bullish Pairing #2: Celgene Corporation (CELG)
Celgene shares are the second component of our atypical pairs trade. Like BIIB, CELG also recently announced earnings and its report provided proof the company’s “growth engine is chugging along,” as it topped Street forecasts and raised sales guidance for its workhorse blood cancer drug Revlimid.
Technically, CELG has many of the same pattern characteristics of BIIB. Relative weakness, however, has been marginally accentuated as we compare share price to Fibonacci, the 200-day MA and lows of the past 15 months near $93.
As a growth stock, the additional price pressure in CELG is hardly surprising. Having said that, and from this deeper positioning, Celgene stock is now testing overhead resistance and looks poised to break out if shares can trade above $106.
CELG Trade Idea
Looking at Celgene’s options board, the Dec $110/$115 bull call spread is attractive. Priced for $1, the vertical buyer has the opportunity to turn a profit of $4, or 400%, if CELG can rally 10.5% into December expiration.
At $106, the spread should fetch $1.35 if the trader wants the support of extra confirmation on the price chart. No doubt, the required gain to maximize profits on the vertical is significant.
Nevertheless, CELG has also shown it’s more than capable of such moves; and in our opinion, that’s a price trend unlikely to stop anytime soon.
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.
