It has been nearly a month and for Biogen Inc (NASDAQ:BIIB) and the biotech sector, it has been a period of “Trump & Dump.” Now it’s “time” to take advantage of value both off and on the price chart with “the art of the steal” using a limited-risk, bullish trade in BIIB. Let me explain.
In winning last month’s Presidential Election, Donald Trump was supposed to have removed drug pricing worries associated with an assumed Hillary Clinton administration. He’s pro-business and, unlike the HRC camp, never campaigned on that front and against drug manufacturers.
As such, large-cap biotechs Biogen, Celgene Corporation (NASDAQ:CELG), Amgen, Inc. (NASDAQ:AMGN) and others which had been under pressure for the better part of 2016, emerged as early winners within a swift market rotation based on the incoming Trump administration.
But was the market’s initial enthusiasm wrong on the biotech sector and for that matter, BIIB stock?
The latest from Trump — and mind you, not a tweet but still pretty vague — hints this could be the case for Biogen and other drug companies. After being named Time’s Person of the Year, during an interview with the magazine Trump stated he doesn’t “like what’s happened with drug prices” and will cut the cost of prescription medications.
If you’re not impressed, despite the pledged bashing actually containing (for once) more than 140 characters; neither is FBR & Co.’s health policy research analyst Chris Meekins. On CNBC Wednesday and amidst BIIB and other biotechs reeling from Trump’s comments, the analyst stated the action by investors was a definite overreaction.
Backing his view, Trump’s appointed head of the Department of Health and Human Services and ironically enough, a fellow by the name of Dr. Tom Price, would not support government pricing regulation.
Secondly, and offering more evidence BIIB and other biotechs will be fine under the new administration, is the Republican Party. The fact is, a new policy on drug pricing would have to get past a majority of Republicans which now control Congress. Good luck with that.
Lastly, FBR noted the man who wrote ‘The Art of the Deal’ was likely asked a leading question in the interview and is really stressing negotiating tactics by Medicare, not vowing to pass new drug legislation. Bearing all this in mind, “the art of the steal” is setting up for bullish investors in BIIB.
BIIB Daily Price Chart
Biotech stocks, even the very profitable ones like BIIB, are renowned for their volatility. The provided daily chart of Biogen is a testament to that.
A cursory inspection of BIIB’s outsized price gaps, both up and down, as well as abrupt shifts in trend, can make all but the most dyed-in-the-wool bull more than a bit uneasy. Having said that, pointing at one or two lines on the Biogen price chart for technical support of some kind seems a bit pointless.
Nevertheless, bulls should still appreciate universally approachable techniques like buying on weakness and uncertainty. Our view is this style of investing is very relevant in buying value in a leading biotech such as Biogen at today’s prices.
And if traders can’t handle this kind of truth? Technically speaking, BIIB is testing zone support from the 200-day simple moving average, a bullish gap tied to positive spinal drug trial results and the 50% retracement level. Let’s go!!
BIIB Stock Modified Collar
Reviewing the Biogen options board and based on slightly-worse-than-mid-market pricing, I like using a partially hedged long stock position in BIIB. Specifically, purchasing a bear put spread for protection and selling an out-of-the-money call to finance the vertical is attractive.
One such position that fits in nicely with our view is buying BIIB stock in conjunction with selling the April $340 call and buying the April $255/$235 bear put spread. Accounting for mediocre liquidity, the package is priced for $285.30. That’s the same price as BIIB stock as the two sides prices should offset one another.
The position affords the trader some protection down to $235 in Biogen for no extra cost, which is nice. The real cost or downside with this variation on a collar is the upside. The bullish investor’s return is initially capped at $340.
Bottom line though, given that the cap established by the call sale is adjustable and would still deliver a return of 19% in a bit over four months if BIIB rallied through $340; that’s pretty attractive. In fact, a good compromise using this spread looks more like “the art of the steal” in our playbook.
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.
