Biogen Inc (BIIB) stock has seen better days. It has fallen as much as 50% from its 2015 all-time highs. BIIB’s industry has been vilified as a bunch of price-gouging companies deserving of punishment. So investors have since curbed their appetite for Biogen stock.
Fundamentally, Biogen is a real business with a decent relative valuation. It beat three out of its last four quarterly reports. So, among bio-pharmaceutical companies, it can be considered as relatively safe.
Technically, Biogen stock recently bounced twice off the $240 per share level. This is the same area that had acted as resistance in late 2013 before BIIB broke out to $350 per share. Eventually it broke out again from there to its $480-per-share all-time high.
Now Biogen stock range is wound tight and a move is coming. The direction of the move will likely be determined by upcoming earnings.
Click to Enlarge Biogen will be reporting earnings Thursday, and I want to bet long on this potential gem of a stock.
Most experts agree that the sector should be avoided during the election period, so I don’t want to risk a fortune buying the stock. Instead, I’d rather use the options market, where I can position myself long Biogen stock for free.
BIIB Stock Trade
Trade No. 1: Buy the BIIB June $275/$280 debit call spread. This is a bullish trade for which I pay up to $1.90 per contract. I stand to double my money in the next two months if Biogen stock rallies past both legs.
Trade No. 2: I will make it even easier to profit by eliminating my out-of-pocket expense. I sell a BIIB January $200 put for which I collect $9 per contract. I only do this if I am willing and able to own BIIB stock at $200 per share. Unless Biogen’s fundamentals unexpectedly and gravely deteriorate, given its three-year chart, $200 would represent a good entry point for a long-term investor.
In trade No. 2, I purposefully chose a debit call spread with some time on the clock because I don’t trust investors to correctly react to earnings at first. So if they initially sell Biogen stock on the news but then it rebounds, I would still stand to profit.
Remember that any call spread profit is pure profit since I have no out of pocket expense.
The beauty of the options markets is that they offer traders hundreds of ways to set up strategies to suit all risk tolerance levels. Someone with a higher tolerance for risk could change trade No. 2 to being an all-or-nothing bet. Instead of buying a debit call spread with 60 days on the clock, one could buy a call with only 13 days until expiration. The $9 collected from selling the BIIB Jan $200 put can be entirely applied to buying the April 29 $272.50 call.
If Biogen rallies on earnings then the profits can be large, but the risk here is that the calls could become worthless in an instant.
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.
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