Are you a contrarian, but also like the company of a storied value investor on your side? Then look no further than Valeant Pharmaceuticals Intl Inc (NYSE:VRX). But instead of buying VRX stock, you’re also not alone if a bullish option to spread sounds a good deal more approachable. Let me explain.
VRX stock has been on the rebound since I last wrote about the much-maligned — and rightfully so — drug company in late March. Our no-cost bearish spread also realized a profit just shy of $1.50 at expiration back in April. K-A-A-C-H-I-N-G-G!!
Given the past success, you might think I’m doubling down on VRX stock as a bear, but you’d be wrong. The only thing I’m doubling down on is using Valeant’s options market with an equally compelling, bullish wager given new information off and on the price chart.
In a nutshell, Valeant is and has been executing strongly on its pledge to reduce its still-massive but shrinking debt with three deals. So far, the actions have chipped away at about $1.5 billion of VRX stock’s liabilities in 2017 and $3.6 billion since last year, providing the company with a stronger maturity profile. That’s good news, right?
As well, following our write-up and limited-risk, bearish profiteering, Valeant announced its first and better-than-expected profit in six quarters. Isn’t that worthy of turning a few heads, or am I alone in thinking that?
Actually, I’m not alone. Bill Miller’s Miller Value Partners sees VRX as a company worthy of investing in. The legendary Legg Mason fund manager known for his 15-year stretch of beating the market using concentrated, value and contrarian-oriented portfolio bets is long Valeant stock.
There are still risks of course with VRX stock, aside from the general investing variety.
The largest concern is likely knowing that while Valeant is executing on its promises to reduce its debt obligations, the asset sales do come with a real cost. Bottom-line, there have been lost revenues and the loss of key products in its portfolio, as well as reduced R&D for VRX stock.
Most recently and due to these necessary actions, Valeant announced its pending sale of its iNova Pharmaceuticals business, and earlier this year, Dendreon was a casualty.
Another potential risk? If you like the comfort of crowds, there are still non-believers in VRX stock. In fact, there’s even more these days. The current short interest of 15% is near its highest conviction since VRX began its long tumble from around $260 in the summer of 2015 and all the way down into the lower double digits.
But before you think, well now they’re really going for the kill, realize the short interest figure only began to balloon from about 2% to 4%, well after the bulk of Valeant’s fall and the attached red flags for VRX stock were first made public.
The point is, it’s our view the bearish increase could in fact be woefully late to the party. As well, while 15% is a relatively high level of shorts, those bets against VRX also aren’t so significantly elevated as to think Valeant is unequivocal roadkill.
Valeant Stock Daily Chart
Looking at the daily chart of VRX, it’s obvious that aside from the multiple promises of a bottom, shares of Valeant still aren’t out of the woods as far as making bullish trend traders feel confident. Then again, VRX stock isn’t going for best-in-show honors, as it is strictly a more speculative and contrarian play.
Optimistically and technically, I like that VRX turned higher over the last several weeks after making a new relative low, but without hitting its financial crisis low of $6.65. Substantial and near-record volume as shares rallied is also viewed as a positive. Of course, also recognizing shorts aren’t necessarily buyers with the same intentions tempers some of that enthusiasm.
VRX Stock Bullish Spread
I’m not alone in liking the idea of using options for tackling positions. Bill Miller is also a guy who has apparently been known for positioning with derivatives in building positions in names like Amazon.com, Inc. (NASDAQ:AMZN) and Apple Inc. (NASDAQ:AAPL).
While Miller Value Partners isn’t positioned with calls or puts in VRX stock, I especially like positioning in riskier names using limited-risk spreads. In reviewing the Valeant options board and with shares at $12.13, using a targeted and modified long call butterfly appears attractive.
Specifically, the Oct $15/$17.50/$19 combination for 29 cents or better is viewed favorably given what has been addressed today. So, what does this option play offer contrarian-minded traders?
First, there’s a profit range that starts above $15.29 at expiration and during the life of the spread — one which could realistically offer some cash at lower levels if VRX stock is still trading in the teens.
Second, ideally though not overly realistic, at $17.50 the trader’s max profit closes in on $2.21 for a return of more than 750%.
Third, if Valeant stock begins to actually trend higher prior to October expiration, because this targeted butterfly is also modified with a tighter embedded bear call spread relative to the bull call spread, this position is guaranteed a profit of 71 cents above $19.
Lastly, if Bill is looking a bit less savvy in the coming months, this VRX stock spread’s max loss of 29 cents does more than a fair job of keeping excessive risk out of a speculative proposition — and those traders using it, a bit smarter looking.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
