Last year was not friendly to pharmaceutical stocks. This was evident as the iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB) was a political rag doll that resulted in incredible chop trading. Bristol-Myers Squibb Co (NYSE:BMY) was no different. Although BMY stock had its high moments, it’s down over 20% in the past 12 months, and things are getting uglier by the day.
Click to Enlarge The Donald Trump election made things worse. The threat of the now-president’s tweets about drug pricing made the sector toxic to investors. However, there was some exuberance late in 2016. We saw many experts tout the drug sector as a catch-up play, but Mr. Trump recently killed that by more attacks in the media.
Today, Bristol-Myers Squibb released bad news on one of its drugs. BMY stock is under severe selling pressure as a result.
I am not one to try and catch falling knives, but in this case I can make an exception. That’s because I see levels against which I can sell risk to take advantage of a spike in put premiums.
How to Trade BMY Stock
The bet: Sell a BMY Jun $42/$41 credit put spread for 15 cents. If successful, this trade would yield 16% on money risked. The 16% price buffer gives me an 80% theoretical chance of success. I need Bristol-Myers to stay above my sold spread while the trade is open.
Some of us who don’t mind owning BMY stock at a certain level can modify the trade for even more juice. This would bring more risk to the table, but a bigger reward too. I only sell naked puts if I am willing and able to own the stock at the strike sold.
The alternate trade: Sell a Jan 2018 BMY $35 put for 90 cents per contract. This trade would commit me to buying Bristol-Myers stock if it falls through my sold strike. If so, anything under $34.10 per share would accrue me losses. For a more conservative trade, I could push it down to a $30 sold put and only collect 40 cents per contract.
I have to note the threat of impeding downgrades. There are a few analysts with buy ratings who could still drop BMY over the next few days. This usually results in secondary downside waves.
I am not required to hold any options trades through expiration. I can close them at any time for partial profits or losses. Selling options is risky and should only be done if I am willing and able to absorb the potential losses.
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. You can follow him on Twitter at @racernic and stocktwits at @racernic.
