The biotech and healthcare sectors were the political punching bags of the 2016 U.S. elections. And now, President Trump’s rhetoric of lower drug prices continues the turmoil in pharmaceutical stocks. As a result, the iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) has had a violent year.
Up until yesterday, the sector was in a recovery. Then renewed promises of new systems for lower drug prices caused another tizzy. Stocks like Bristol-Myers Squibb Co (NYSE:BMY) suffered with the herd. Today’s price action, however, is encouraging, as investors bid BMY higher.
Late January, I shared how to go long BMY on a panic dip. The trade was an easy success. Today I plan on repeating performance with a similar concept.
The fundamentals have not changed, so I won’t spend time re-dissecting them. There may be concessions to be made, but considering the size and influence of the biotech sector, I bet that they will be much milder than the built-in fears of Wall Street.
How to Trade BMY Stock
The Bet: Sell the BMY Jan 2018 $43 puts and collect $1.30 per contract to open. The 23% buffer from current price allows for a 90% theoretical chance of success. I need BMY stock to stay above my sold put, though. If not, I will be need to buy BMY shares. So I only sell naked puts if I am willing and able to own the stock. Anything below $42 would accrue losses for me. For those who don’t want to risk being put BMY stock I can change the trade to be a credit put spread instead.
The Alternate: Sell a BMY Jan 2018 $43/$40 credit put spread for $1.01. Unlike the naked put sold, the credit spread has a finite risk profile. The price buffer is the same, so this has a 90% chance for yielding 33% on money risked. I need Bristol-Myers to stay above my sold spread while the trade is open.
I am not required to hold my trades open through expiration. I can close them for partial gains or losses at any time. Selling options is risky, so I never risk more that I can afford to lose.
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.
