Biotech stocks are volatile by nature, especially the high-dollar ones. Regeneron Pharmaceuticals Inc (NASDAQ:REGN) is one that sees massive moves in absolute terms given it’s over $400 per share. Today, the stock is rallying 6% which makes it not ideal to chase but I will still set up a cautious long trade in it.
Fundamentally, REGN stock is not cheap from a price-to-earnings ratio standpoint compared to its sector, but analyst expectations are pretty humble so the chances of disappointments is minimal.
Technically and if I ignore the extremes, Regeneron is trading inside a well-defined ascending channel. The current rally is approaching the upper limits of the range, so entry long here must be cautious. I ignore the extremes because most often they are overshoots and somewhere in the middle lies the truth.
Click to Enlarge Since I am a conservative investor, I won’t risk $430 per share buying the stock at face value and without any room for error. My money would be at risk right here and right now.
This is especially risky since markets in general are near all-time highs.
So I will use options to set a bullish trade with plenty of room for error.
REGN Stock Trade Idea
The Bet: Sell the REGN Nov $300 put and collect $5 to open. Here I have a 90% theoretical certainty of maximum gains if it stays above my sold strike. Otherwise I will suffer losses below $295. Buying sacrifice puts over trigger events like earnings would be a smart move.
So in essence, I am getting paid for a chance to buy Regeneron stock at a 30% discount from current price.
Not everyone is prepared to be assigned REGN in the event of a correction, so I can modify this trade into a credit put spread instead where risk is limited yet still yield 10% on risk.
The Alternate: Sell REGN $305/$300 credit put spread which is also bullish and has about the same chances of success. But here my risk would be equal to the width of the spread less what I collect to open.
I don’t need REGN stock to rally for profit. I merely need price to stay above my sold risk. Compare this with risking $430 now and hoping they rally 10% to match my setup.
E-mail sellspreads@gmail.com with questions or join me to learn more about options 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.
