Bristol-Myers Squibb Co (NYSE:BMY) stock has had a rough 12-month period, down over 30% within that tine range. Compare that with the 10% performance of the iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) — as a collective, they’ve outperformed BMY.
Nevertheless, the fundamentals in BMY stock don’t support the downtrend in an obvious manner. It’s not expensive from a price-to-earnings aspect. On paper the margins are mid-range, growth is healthy and the dividend acts as built-in support for stock price.
Technically it’s never an ideal time to catch a falling knife that has dropped 30% in less than a year, especially when the equities in general are testing all-time highs. This could be the proverbial falling knife situation that most traders avoid. But it could also be the very opportunity that investors are looking for, and therein lies the opportunity.
Click to Enlarge When I trade stocks, I usually look for mid-term support levels. No, I don’t buy the stocks. Instead I generate income from selling premium against those levels. The idea here is that BMY is near levels that should would entice buyers to defend my risk.
The 2017 trading range for Bristol-Myers stock has tightened so I expect a move soon. With $50 as a long-term pivot point, I want to assume that the break out will be positive. Conversely, I have to note that if the $50-per-share area fails, there could be more momentum selling for another 8% from there.
Entry points are never going to be perfectly clear, but as this trade demonstrated, even with less-than-ideal timing, option trades can still be profitable.
BMY Stock Trade Idea
The Bet: Sell BMY Dec $45 put and collect $1 to open. The 16% price buffer gives me a 90% theoretical chance to retain maximum gains but if price falls below $45 I have to be willing to own the stock. My breakeven point is $44 per share.
Otherwise, to limit the risk, I should use a bull put spread instead. The $45/$40 spread has the same chances of success only with my less risk. The compromise is that my maximum gains would be smaller in absolute terms but still yield over 10% on risk. Compare this with putting $54 at risk with no margin for error then needing BMY stock to rally 10% only to match the performance of the spread.
Learn how to generate income from options 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.
