Trade of the Day: Eli Lilly (LLY)

Eli Lilly (LLY) options offer a good risk-reward scenario

   

Stocks continued their climb higher Thursday, with the S&P 500 joining the Dow Industrials in new high ground. That should bode well for stocks going forward.

Market Outlook

Our indicators are giving bullish readings, as we mentioned last Friday.

A potential positive trend change that is again trying to establish itself is a bullish move by U.S. Treasuries, which has clawed its way back above its 50-day moving average. Rising Treasury bond prices of course translates to lower interest rates. But the iShares Barclays 20+ Yr Treas.Bond ETF’s (NYSE:TLT) history over the past several months is one of sudden moves higher, only to be followed by larger moves lower, which has resulted in a very defined “lower highs, lower lows” chart pattern. And TLT’s current strength is likely a result of ongoing drama from Europe, which in the past has proven to be a short-term event.

The key indicator for all traders and investors continues to be the Federal Reserve and other central banks pumping out new liquidity at an historically rapid rate. It remains to be seen how this policy will eventually play out (and as we’ve written before, whether it even can be reduced much less reversed without causing massive chaos in financial markets). That means options buyers should continue to lean toward call options, while also holding a few puts “just in case.”

Best Options Trade

Eli Lilly (NYSE:LLY) is a major pharmaceutical company that has been in an uptrend along with many other drug stocks like Bristol Myers Squibb (NYSE:BMY) and Pfizer (NYSE:PFE). It recently broke above resistance at $55.50 and should continue moving higher. Here is the best way to play more strength in Eli Lilly …

Buy the Eli Lilly (LLY) Jun 57.5 Call (LLY130622C00057500) at a suggested price of $1.30 ($130 per contract).

After taking the position, enter a good-til-cancelled contingent order to sell this option if the stock hits its target price of $58.30. That should give you an option price of about $2, for a 53% profit.

Close this position and cut losses if the stock closes below $55.90, when the option price should be about 90 cents. The stock is currently trading at $56.79. The computer-simulated probability of this option hitting its target price is 28%, though the chances of it reaching a lower profit target are higher.

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