The seemingly endless slide in Valeant Pharmaceuticals Intl Inc (NYSE:VRX) reached new depths on Wednesday. And if recent history is any indication, the new 52-week low for VRX stock ($9.66) will hold for a nanosecond before yet another one is reached.
With Valeant shares locked in a death spiral, what’s a spectator to do? Should we bet with the grim reaper and load up on bearish bets? Or should we tap into our inner contrarian and bet on a rebound in this severely oversold stock?
Both, I suspect, have legitimacy. But before we hash out a pair of VRX trades, let’s get our bearings straight by assessing its price chart.
VRX Stock Chart
For starters, if you’re wondering whether Valeant stock has ever been this cheap, the answer is yes. Long ago in the dark days of 2008, VRX descended to a lowly $6.65 per share. So this isn’t exactly unprecedented.
Of course, back then, Valeant’s death dive didn’t begin from a lofty $260, so really it’s tough to compare.
From a price perspective, Valeant Pharmaceuticals looks grim. The bearishness of its behavior can’t be overstated. It’s submerged beneath moving averages on every single time frame. The 20-day, 50-day and 200-day moving averages are swooping lower like a hungry hawk in search of prey. Except in this case, the prey are poor VRX stock holders.
And let’s be honest: They’ve already been picked clean at this stage.
Click to Enlarge
Bottom fishers could make the case that Valeant stock is oversold at this point. Since its last pivot on March 29, the stock is down 15.5%. So sure, it’s a bit stretched down here. This obviously increases the appeal of a contrarian trade while making new bearish trades feel like we’re chasing a bit.
A Pair of Trades for VRX Stock
The Bear Trade: Bears looking to bank coin on continued pain could consider purchasing a put spread. This will limit the risk in case the stock snaps-back. It also will reduce the cost of the trade versus a straight put buy. Purchase the July $9/$7.50 put spread for 56 cents.
The risk is limited to the initial 56 cents and will be forfeited if VRX sits above $9 at expiration. The reward is limited to the distance between strikes minus the net debit, or $1.94, and will be captured if the stock falls below $7.50 by July expiration.
The Bull Trade: Bulls looking to score on a rebound in VRX stock could sell the May $9 put for 65 cents. If the stock sits above $9 at May expiration, you will pocket the premium received.
By selling the put, you are obligating yourself to buy 100 shares of stock for each put sold. To avoid assignment, you could exit the trade if VRX sits below $9 near expiration.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
