Biogen Inc (NASDAQ:BIIB) has been awfully kind to us in 2017. Oh sure, the stock price is awful, down 3% amid an up market, but we’ve been successfully able to squeeze profits out of BIIB stock despite its tepid movement.
On March 16, I shared a Biogen trade that delivered profits out of thin air. And before that, I took another long entry into BIIB that also yielded fast profits.
As you can see, trading a historically volatile sector like biotech is relatively easy when you use options.
Fundamentally speaking, BIIB stock isn’t extravagantly expensive, at least not based on price-to-earnings. On the technical side, shares are inside a long-term consolidation zone as pictured on the chart below. In 2015, investors overbought Biogen to $420, and more recently they oversold it to $205 per share.
I don’t like chasing price targets in either direction. Instead, I prefer to sell risk against unrealistic levels.
From here, analyst expectations aren’t alarming, and in fact seem well-balanced, so there’s a low chance of a downside surprise when the company reports earnings Tuesday morning. On the flip side, equity markets in general are near all-time highs, but the world is abuzz with “animal spirit” — especially on the back of France’s presidential elections, which provided some global relief — so there could be room for more upside.
My only worry is still-looming political pressure, as President Donald Trump is insistent on massive changes in regulation and pricing structure.
I am a conservative investor, so I’m not comfortable risking $273 per share to buy BIIB stock here and hope it rallies. Instead, let’s just keep doing what has worked so far: sell risk against proven support to generate income. This way, we can go long a stock, but with a lot of room for error. That’s especially important with Biogen earnings on deck, as the short-term reaction to these events is typically a coin flip.
How to Trade BIIB Stock Now
The trade: Sell BIIB Oct $200 put and collect $2.25 per contract. This is a bullish trade with a 95% chance of success. If BIIB stays above my strike I would have generate income out of thin air. But if BIIB stock falls below it I accrue losses below $198 per share. In essence I am getting paid a nice premium for the chance to buy Biogen stock for a 26% discount from today’s price.
Usually I like to sell opposing upside risk.
The hedge (optional): Sell BIIB Oct $340/$345 credit call spread where I have an 85% theoretical chance of yielding 10% on risk. I am inclined to delay entry into this until after the earnings.
Learn options as easy as 1-2-3 in a personal 1on1 webinar here. 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.
