Buy Vertex Pharmaceuticals Incorporated (VRTX) Stock Like Its 20% Gain Never Happened

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Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) had an incredible day on Wednesday spiking over 20% on a favorable headline regarding drug trials. Specifically, VRTX stock was bid up on three various combination drug regimens to treat severe cases of cystic fibrosis, and Wall Street went nuts.

Buy Vertex Pharmaceuticals Incorporated (VRTX) Stock Like Its 20% Gain Never Happened

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I usually don’t like to chase headlines about progress in drug development, as they don’t offer a tangible near-term positive change to the P&L. It’s usually just news about milestones. This is especially true when the stock jumps as much as VRTX stock jumped on Wednesday.

Compare this to the recent jump in Alibaba Group Holding Ltd (NYSE:BABA) where management actually gave us the math behind the higher valuations. BABA’s headline actually changed the current fundamental assumptions. This is not yet the case here on this VRTX spike.

So going long Vertex here makes me feel like Johnny-come-lately. That’s why today I am sharing a bullish trade, but where the setup makes it as if the spike hasn’t happened. No, I don’t have a time machine, but I do have the use of VRTX options. There I can set up bullish trades with room for error thereby giving me a second chance to trade the headline.

Fundamentally, VRTX is definitely not cheap with a triple-digit price-earnings ratio, which even eclipses that of Amazon.com, Inc. (NASDAQ:AMZN). So I am not going long it based on value, but rather as a pure play off the price action and the headlines it generates.

This week’s headline mentioned future actions on this front but not until 2018. This leaves the door open for a few months to trade the wave. Meaning that the anticipation of more progress will keep a floor under the stock, and therein lies the value against which I can sell risk.


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Technically, I can identify several consolidation zones and I want to hide my trade in between two of them. Usually when prices revisit those zone, bulls and bears then to battle hard over them thereby creating stalemates which is support.

The Bullish Trade: Sell VRTX Dec $105 naked put and collect $1.30 to open. Here I have a 90% theoretical chance of keeping the entire premium for maximum gains. But if price falls below my strike, then I have to own the shares at that price and accrue losses below $103.70.

This is the definition of a calculated risk but only as long as I am willing to own VRTX stock 30% lower. If price goes against me I am confident that I can trade my way out of it for minimal damage. But in case I want to mitigate the risk I would then sell a spread instead.

The Alternate Bullish Trade: Sell VRTX Dec $110/$105 credit put spread where I have the same odds of success, but with much less money at risk. If successful, this spread could yield close to 10%. The alternative to selling puts would be to risk $160 per share, without any room for error, and hoping for a 10% rally just to match the performance of the spread.

While a 30% price buffer eases the mind somewhat, it’s no guarantee. Investing is dangerous, so I never bet more than I am willing to lose.

Learn options as easy as 1-2-3 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.

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2017/07/buy-vertex-pharmaceuticals-incorporated-vrtx-stock-like-its-20-gain-never-happened/.

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