Some investors were apparently dealt a joker in Regeneron Pharmaceuticals Inc (NASDAQ:REGN) Thursday. But please take a step back, as the nearsightedness fails to appreciate REGN stock’s trump card, still-solid growth prospects and sizable opportunity for bulls looking forward.
REGN is presenting investors with a gift. Shares of Regeneron closed down 3.7% Thursday following news the company’s joint study of its cholesterol-lowering drug Praluent would not be terminated early. “Oh, no!!??”
My vote on Thursday’s trading verdict is to tell investors to relax, then look at the big and more opportunistic picture in REGN stock.
The fact of the matter is Praluent’s interim point results were solid and trials will continue to proceed as intended. And truthfully, there’s nothing wrong with that.
Secondly, looking past a longshot early termination of the “Odyssey Outcomes” study, coupled with biotech’s newfound Trump card that has all but eliminated drug pricing anxieties associated with a HRC Presidency, investors have very good reason to be optimistic on a still very healthy-looking REGN stock.
REGN Stock Price Chart
If you’re a chart reader, there’s also reason to be bullish on REGN right now. Shares of Regeneron have corrected over the past year and established a durable-looking double bottom after breaking a bearish head and shoulders pattern.
Currently and on the heels of the Donald Trump-inspired bid last week, REGN stock has pulled back towards its 50- and 200-day simple moving averages after notching a fresh intermediate high.
The moving averages should act as support from institutional buyers. However, if conditions got really generous or “naughty” depending on whom you chat charts with, REGN’s bullish price gap might get tested before, in our estimation, the selling is fully cleaned up on the downside.
REGN Bullish Combo Position
Reviewing the options board with REGN near $404.50, I like the idea of selling an out-of-the-money put spread and simultaneously buying an out-of-the-money call spread for a net credit.
One combo which looks interesting is selling the Dec $380/$355 put vertical and purchasing the Dec $440/$455 call vertical for a net credit of $2 or better.
There are essentially three outcomes possible with this position. First, the trader can collect the entire credit if shares of Regeneron stay above the sold $380 strike of the vertical put spread. That’s nearly 5% below current prices and offers a nice margin of safety.
Secondly and if REGN were to move into or below the put spread, through the assignment process the trader can get long shares at a substantial discount to current price levels.
The risk associated with getting long through assignment is limited and dictated by the width of the spread minus the net credit received. That’s a nice feature given REGN is, at the end of the day, a biotech company and part of a space known for its volatility.
The actual dollar risk with our proposed combo trade works out to $23 or roughly 5% of REGN stock risk. Importantly, unlike a trader long REGN stock from $404.50, shares would have to slump below $355 before the max drawdown.
Lastly and in the event REGN rallies during the life of the spread, this bullish trader has an upside vertical established for a credit. Above $455, this would net a profit of $17 per combo at expiration.
Bottom line, that type of price move merrily trumps other scenarios, but the other two outcomes look like winning propositions in their own right and worth bullish investors’ consideration.
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.
