Staging a high-level, technical breakout in an individual and component stock such as Express Scripts Holding Company (NASDAQ:ESRX) when the underlying index SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is under pressure can be trying for bullish investors, to say the least.
And that’s the scenario that unfolded during Wall Street’s less-than-stellar finish to the quarter.
On Tuesday, a day in which the SPY fell by 0.87%, remained in the red all session, barely managed a quarterly gain of 0.2% and finished on less-than-firm technical support, shares of ESRX rallied by 1.6%.
Given not having the broader market at your back, ESRX’s own pin action in its shares seems pretty healthy, right?
To some degree, yes, but it’s not nearly as robust as its intraday high; ESRX tacked on more than 3.5% to $88.55 and was just a heartbeat away from Express Scripts’ all-time high of $88.83.
So, what’s an investor to do? Well, after diagnosing the action, volatility history and listed options in Express Scripts stock, a bull call spread is the type of medicine this trader views as appropriate for the situation.
Click to Enlarge Express Scripts’ chart contains important vitals for traders interested in using an option strategy like the bull call spread in lieu of making a straight-up position in ESRX shares.
First and most familiar to stock traders, the daily candlestick price action of ESRX shows that the past three-and-a-half months (roughly) have been spent mostly consolidating laterally in a range of around 10%.
Next, the chart shows an implied (call and put prices) and statistical (ESRX stock action) volatility overlay. The blue implied volatility line spiked up Tuesday to roughly 25% and slightly above ESRX’s underlying price movement, which is denoted by the brown line. What’s this mean
The quick and dirty diagnosis is that option prices are currently a tad expensive in relation to ESRX stock. Additionally, examining Express Scripts’ volatility history for the past year, we find implied pricing is also somewhat costly if we simply eyeball ESRX’s history.
In fact, the only occasions where option prices have been more expensive were around earnings in three of the last four confessionals.
A Trade on Express Scripts Stock
Now on to the actual recommended bull call spread in Express Scripts.
ESRX has been testing 50-day simple moving average support within the trading range. Should support hold, the April $83/$86 call spread for $1.65 is an efficient way to trade ESRX stock.
Based on a price of $84.65, this bull call spread limits its risk to the debit of $1.65 and breaks even at current prices, rather than lose money due to time decay associated with an outright long call or out-of-the-money bull call spread.
What’s more, this ESRX vertical allows for its max profit potential of $1.35 above $86 and without requiring an actual breakout.
The yellow highlighted zone in the chart above reflects where profits begin to accrue within ESRX’s trading range. And the last I checked, with the SPY still coughing technically within its own consolidation, an ESRX vertical is the correct prescription for bulls.
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. Mr. Tyler currently holds no positions in Express Scripts Holding Company in his personal or managed family accounts but may initiate, for better or worse, a position in two or more business days following the publication of this article.