In my previous write-ups, I’ve referred to my Valeant Pharmaceuticals Intl Inc (NYSE:VRX) trades as bets. It’s not because I am a fan of gambling but it’s because of how the stock trades. The price action resembles the action at a casino.
I often need speculative risk in my portfolio. VRX stock fits the bill. And I have done it before, as per this trade from last month that delivered a huge home run.
Now I can repeat the process knowing I have profits in hand. The strategy remains the same. I am not risking my money today hoping that Valeant stock rallies. Instead, I am betting that the recent fears created a tradeable bottom against which I can sell premium to generate income out of thin air.
Click to Enlarge Fundamentally, I don’t know who is right between the bull or bear arguments. All I care is that they fight it out while I let time make me money. You know the names and you’ve read the headlines. Sporadically we see a huge move in one direction or another based on what a whale did or said about Valeant.
Technically, VRX stock is almost done filling the upside target of a technical measured move that started last week. This is strong momentum but it comes with disadvantages. The first being that the rally has been huge, and going long now is risky. Add to it that markets in general are also near all-time highs, which elevates the timing risk.
There are also potential headwinds from the band just above the current level. The next upside dollar in the stock has been a big pivot point, which usually makes for a big fight between bulls and bears. This could create a stalemate which would be good opportunity for premium sellers.
I want to emphasize that I am not making the fundamental argument of more upside in Valeant stock. I am merely betting on the price action and that there is a tradeable bottom.
VRX Stock Trade Idea
The Bet (With Emphasis on “Bet”!) — Long VRX Stock: Sell the VRX Oct $12.50 put and collect 70 cents per contract to open. Here I have an 80% theoretical chance of success. But I am committing to owning the shares if price falls below my strike. Then I would accrue losses below $11.80.
Alternatively, and for a more finite risk profile, I could use a bull put spread which has limited risk. Sell the Oct VRX $12.50/$11 credit put spread which has about the same chance of success and would yield 15% on risk. I could then decide to sell the protection leg of the spread after the earnings and add to my potential profits.
Last time I shared a VRX trade, I had an option to buy calls to capture the potential upside but not this time. Today’s trade has a much higher starting point thereby greatly reducing my faith in much more upside left in the stock.
Also here I won’t sell upside risk for balance as I fear the wrath of the VRX fans. This stock defies logic and so I would not want to pick a fight with its upside.
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.
