Biotech stocks are ramping this month, but not all drug companies are joining in the bullish festivities. Unfortunately for shareholders of Gilead Sciences, Inc. (NASDAQ:GILD), the California-based biopharmaceutical company has been moving to the beat of a decidedly bearish drum. And, as we’ll soon discover, opportunity awaits for those looking to capitalize on continued weakness in GILD stock.
Since opening at $267.56 on Jan. 31, the biotech sector, as measured by iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB) has climbed 13% to $295.00 last week.
But don’t think it’s Gilead Sciences driving the bullish bus. Despite being one of the largest holdings of IBB, GILD stock has been trending lower for years now.
This past month’s drop was due in large part to an earnings announcement that disappointed the Street. GILD suffered a one-day 8.6% haircut after earnings, tagging a new 52-week low at $65.38. Last week’s climb was nothing more than a dead-cat bounce. For all its vigor, the rebound simply carried shares back to a significant overhead resistance level.
The $70.50 price zone acted as major support on the way down, so it’s no surprise that we see it turn into resistance here. Couple that with the descending 20-day and 50-day moving averages looming overhead, and this looks like as good an entry point as any for bearish plays.
A Profitable Put Trade Awaits in GILD Stock
Along with every other security under the sun, implied volatility in Gilead Sciences options is depressed, and that favors a long option play here. Consider buying the April $70 puts for $3.10 or better.
The maximum risk is limited to the initial $3.10 debit and will be lost if GILD stock sits above $70 at expiration. The maximum reward is limited only by the stock falling to zero, so prepare to grab BIG profits if the stock really bites the dust.
If you’re looking to exit early if Gilead turns too bullish, I suggest using a break above the 50-day moving average at $72.26 as your signal.
At the time of this writing, Tyler Craig had no positions in any of the aforementioned securities.
