Valeant Pharmaceuticals Intl Inc (VRX) has certainly been on a wild ride of late, following on the heels of a negative Wells Fargo analyst report, further negative comments from famed short seller Jim Chanos and a report from the Wall Street Journal Monday afternoon hinting that Valeant was likely to restate earnings.
Valeant stock, however, rebounded sharply yesterday after the alleged restatement failed to materialize.
This type of price action is indicative of a bottom in the VRX stock price, with the after-hours stock chart showing a wash-out in Valeant.
The short-term lows may be in for Valeant.
Click to Enlarge The 5-minute chart shows how Valeant stock plummeted nearly 10% to a low of $68 after hours Monday following the release of the Wall Street Journal report, only to rebound and trade higher. This type of reversal pattern is normally a bullish sign, with the weak longs capitulating and the shorts covering aggressively.
It also reinforces the risk of trading after hours with less-than-complete information.
On a longer-term technical basis, Valeant stock looks attractive on the chart as well. VRX traded down to critical support at the $72.43 level on Monday before reversing and closing well off the lows at $75.92. Yesterday saw Valeant shares add to the gains on an overall bad market day, closing higher by more than 4% at $79.27.
VRX Stock Bullish Put Spread
Click to Enlarge30-day implied volatility (IV) remains elevated at 96.84 (a reliable contrary bullish indicator), while nine-day RSI bounced off the oversold level of 30. With IV at lofty levels, option selling strategies make sense, so I am positioning by selling a guardedly bullish option put spread.
Specifically, I am selling the March $65 puts and buying the March $62 puts for a 55-cents net credit. These are regular monthly options that expire March 18.
The $65 strike is 18% below the $79.27 Tuesday closing price of VRX stock, providing ample downside cushion. The $65 level also equates to the price target from the bearish Wells Fargo analyst report.
The maximum gain on the trade is $55 per spread, with the maximum risk being $245 per spread. Return on risk is 22.4%.
I would look to close out the position on a meaningful break below the $68 level, while looking to let the position expire and keep the initial $55 credit if Valeant stock remains well-behaved.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
