Profit From Volatility in Gilead and Celgene

by Michael Shulman | November 13, 2012 11:23 am

Gilead (NASDAQ:GILD[1]) and Celgene (NASDAQ:CELG[2]) are two very large biotech firms, large-caps that growth investors like but income investors shy away from, because they do not pay dividends.

But actually, GILD and CELG both pay dividends — but not a check every quarter, cash every month. You just have to spend a bit of time to claim the income.

How? You sell puts.

Sell a put that expires in five weeks on GILD and your annualized return is 11.4%. Sell a put that expires in 10 weeks on CELG and the annualized return is 26%.

Gilead and Celgene are both terrific companies I have followed for more than a decade. They both made big waves yesterday with positive results in late-stage drug trials[3].

For many years I told anyone who would listen — usually just my cockapoo, Sumo, but you have to start somewhere — that Gilead is the best-managed drug firm on the planet. It still is. The company owns the HIV treatment marketplace, including new approvals to use its anti-retrovirals prophylactically to prevent HIV.

Mixed success in broadening its scope to other treatments held the stock back the past few years, but it has broken out and is an ideal stock to sell puts against. If you get put the stock, you don’t mind owning it … and you can immediately sell premium-rich calls against the position. And the stock retains much of the volatility associated with biotechs even though it’s a mature, highly profitable company — and that means you get a lot of money when you sell a put or a call.

Celgene broke out as a company by turning one of the most hated and failed drugs, ever, thalomid — the source of countless birth defects a couple of generations ago — into a highly effective (compared to other available treatments) for multiple myeloma. Like Gilead, the company has broadened its array of treatments through acquisition; like Gilead it is volatile and therefore puts and calls command large premiums. Similarly, if you should be put the stock it is great to own not just because of potential appreciation, but also to sell calls against to generate income.

Consider selling puts one strike below the current stock price for the next cycle, which in this case is December. If you want more cash for the holidays, push out to the next month, January.

If you really hate the thought of being put the stock, don’t do the trade; if you dislike the thought of being put the stock but would not try to hunt me down if it happened, push the position two strike prices down — but this may require you go out to January.

But don’t be afraid of being put either GILD or CELG. They are great growing companies, unlike Big Pharma dinosaurs buying loyalty from shareholders with unsustainably high dividends. And with Pfizer (NYSE:PFE[4]) yielding less than 4% via dividends, you can easily do twice that selling puts on GILD or CELG — just as you can with any number of great, mature companies with somewhat volatile stocks. It’s what I do all day long in my Options Income Blueprint [5]service.

For those of you looking to buy puts or calls — the speculators among you — this is not the time. Not because of any problems with the companies or their stocks, but because of the bigger environment we find ourselves in. I live in Washington; I keep my ear to the ground. There is a small but nonzero possibility the wonderful people on Capitol Hill will lead us off the fiscal cliff. If you sell puts, you end up with stocks below their current price that serve as a capital base to generate cash every month. But if you own calls and this happens, you own a tax loss. Caveat emptor.

Last point: I no longer write a service about biotech, but I love and follow the sector. If you have questions, shoot me an email at

  1. GILD:
  2. CELG:
  3. positive results in late-stage drug trials:
  4. PFE:
  5. Options Income Blueprint :

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