Biogen Inc (NASDAQ:BIIB) stock has had a rough couple of months, sliding 15% since March. The earnings reception was less than ideal from Wall Street.
The stock price move is a mere change in perception. It doesn’t change the reality that BIIB is reasonably priced from a price-to-earnings perspective and with decent margins. So the fact that investors have dissed it presents an opportunity.
Technically, it’s not ideal to catch a falling knife but since BIIB’s quality as a company is not in question makes it an easier task. No, I will not risk $257 per share here and without any room for error. Instead I will use options so I can go long Biogen stock but with a buffer.
Click to Enlarge Most traders avoid going long stocks that are in decline for fear of jumping in too early. Precision timing is key when buying equities. Using options eliminates the need to be surgical in my entry points. Case in point, this trade from April that delivered profits even with less than ideal timing.
The hedge helped the success, but even without it, the bull put spread alone was still positive.
Today my thesis stays the same. I believe that most of the damage has already occurred in BIIB stock. If it falls another 18% I will be willing to own it.
BIIB Stock Trade Idea
The Bet: Sell BIIB Sep $210 put naked and collect $1.75 per contract. Here I have a 90% theoretical chance of retaining my maximum profit. But if price falls below my strike, I own the shares and would suffer losses below $208.25. I would buy cheap July equivalent sacrifice puts to temporarily guard against the crash scenario through earnings and especially that the stock market is at all-time highs.
Not everyone is willing or able to own BIIB shares though, and for those, I could use credit spreads instead.
The Alternate: Sell BIIB $210/$200 credit put spread where the trade has the same chance of success but with a limited risk profile of 65 cents. Yet, the trade is designed to ideally yield 8%. Compare that with risking $256 to buy the equity and with no room for error, then needing the stock to rally another 8% just to match the performance of the spread.
Selling options is risky business so I never risk more than I am willing to lose.
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.
