Valeant Pharmaceuticals Intl Inc (NYSE:VRX) finished down 5% on Monday, which caught my attention. The last trade I wrote on VRX stock was an easy win using the December contract, and I think it’s time for another free trade on this fast-moving biotech.
Going long Valeant stock seems like an insane proposition. Since I am not crazy, I won’t be buying the stock outright. The price action in VRX is definitely the equivalent of playing Russian roulette with headlines. Luckily, the options markets offer me hundreds of ways I can trade shares with limited risk exposure.
Fundamentally, nothing has changed in the overall picture of VRX stock. It still has its fans who argue that its business model is legitimate, while others label it a shady company living on borrowed time. It has its uber-fans and mega-shorts; somewhere in the middle is likely where the truth lies.
Click to Enlarge Technically, Valeant’s stock chart leaves little room for analysis. VRX has fallen off a cliff, so recent lows may not count for much when it comes to support. I am left referring to the post-election down-gap low as the level to watch.
The Trump rally, although widespread, did not include biotech companies. So in addition to its own woes, VRX is also laden by the downside pressure from the whole sector. The iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) is down about 10% since Nov. 11; other quality companies like Biogen Inc (NASDAQ:BIIB) are also down significantly in the past few weeks.
The trade: Sell the VRX Apr $7.50/$5 credit put spread for 33 cents per contract. This trade has a 90% theoretical chance of success, with a 50% buffer from current price. If successful, this trade would yield 14% on money risked. Since I sold this spread, time is my friend as long as Valeant doesn’t collapse.
I don’t need VRX stock to rally for me to make money. Ideally, I just need Valeant to stay above my sold spread by contract expiration. I am not required to hold the trade through expiration. I can close it at any time for partial gains or losses.
I could find similar trades for shorter time periods. But in this case, I wanted to step farther away in time than my usual setups. Having a bigger price buffer and more time on the clock makes the trade easier to manage should VRX move against me.
Optional: Having collected money to open this trade, I could put it to use by buying debit call spreads. These would be bullish trades, but time is my enemy. So I won’t do this unless I learn something exciting about VRX fundamentals or I see technical signs of upside.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and StockTwits at @racernic.
