The death spiral in Valeant Pharmaceuticals Intl Inc (NYSE:VRX) stock continued in earnest this week, and accelerated on Thursday. Today’s 7.5% plunge is carrying shares of the ailing drugmaker to fresh 52-week lows. In fact, this morning’s dive marks the first time VRX stock has touched $13 since 2009.
Click to Enlarge
While a joyous reunion for bears, Valeant shareholders are beside themselves.
Today’s tumble is carrying shares beneath a crucial support level. The inability of buyers to defend their turf here is telling. The last time VRX stock visited the $14 floor, the groundswell in buying was sufficient in delivering a quick 30% pop to the stock ($14 to $18.80).
This time? Not so much.
Spectators surprised by the recent weakness need to have their eyes checked. Short of a mild bullish blip in August, VRX stock has been ravaged by bears all year long. All major moving averages are descending in bearish fashion. The downtrend that kicked off in mid-August has been as consistent as its been long.
If you’re hoping for a silver lining in the breakdown, there isn’t one. Sellers have dominated volume patterns ever since the post-earnings snap back. Indeed, the rise of distribution days is anything but comforting to Valeant stock owners hoping for a reprieve.
Hit a Double With VRX Put Spreads
Traders might use today’s support breach as an excuse for initiating a new short play. If you’re looking for a loose stop-loss, consider the 20-day moving average currently perched at $16. If you find the unlimited risk associated with shorting unpalatable, then I suggest put options.
While some may want to go for the gusto with a straight put purchase, long put vertical spreads offer a lower-risk, higher-probability alternative.
For example, if you think VRX stock can fall to $10 by April expiration, you could buy the Apr $15 put while selling the Apr $10 put for a net debit of $2.45. The max loss is limited to the initial $2.45 cost, so you won’t suffer unending pain during some type of short squeeze.
On the profit side, the put spread offers $2.55 of gain if VRX can fall below $10 by expiration.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
