Biogen Inc (NASDAQ:BIIB) stock, much like the rest of the biotech and healthcare industry, has had a tumultuous few months. First, Hillary Clinton used biotechs as political scapegoats and now President Donald Trump is targeting price-gouging in the industry.
The perception is that the majority of drug companies are gouging the public. While there might be bad apples in the bunch, BIIB is not a particular target for its practices. Since the issue at stake is the pricing model, most investors fear devastation to the company’s top line.
Although the Biogen stock price is high, fundamentally it’s on the lower end of the scale relative to its peers. For instance, the price-earnings ratios of Celgene Corporation (NASDAQ:CELG) and Pfizer Inc. (NYSE:PFE) are three and two times that of BIIB, respectively.
In the current choppy environment, it is difficult to find perfect entry points into pricey volatile stocks like BIIB using traditional investing. But using the options markets, I can design entry points almost at anytime. I recently shared a long entry into BIIB that yielded fast profits.
Today, I want to share a trade setup that is designed for low maintenance, especially if equity markets in general don’t collapse this year.
The Trade: Sell the BIIB Oct $195 put. This is a bullish trade that pays $3 per contract. With this trade, you’re essentially selling someone a losing lottery ticket. If BIIB stock stays above the strike, they lose and you keep the premium. I chose $195 because it’s below a solid bounce area since 2013. Selling naked risk can be dangerous, however, and not suitable for all investors. I only sell naked puts if I am willing and able to own the shares at the strike price. So I will also share an alternate setup better suited for milder risk appetites and smaller accounts.
The Easier Route: Sell the BIIB Oct $200/$195 credit put spread. This remains a bullish trade, but one that has a finite risk profile. Here I have a 90% theoretical chance of success in yielding 15% return on risk. Even though this trade isn’t for a few months, you are not required to hold the trades open through expiration and can close them for partial gains or losses at any time.
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.
