The scandal and missteps of 2015 and 2016 may have faded, but Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is still a wildcard for investors. For traders wanting to position for a large price move, either up or down, a volatility spread using VRX options could be the right prescription. Let me explain.
For the bears, a good chunk of Valeant’s massive debt obligations comes due next year. Total liabilities of $30 billion in of itself is daunting, but with the clock also ticking VRX stock is clearly not out of the woods in 2017.
More optimistically, if Valeant is able to find buyers for its larger and lucrative Salix and Bausch & Lomb businesses, that could prove a huge boon for Valeant shareholders. Bottom line, a sale of either or both assets would greatly reduce near-term financial risks and as a result, VRX could reasonably, skyrocket higher.
Getting past Valeant’s debt obligations, comparable sales valuations within the industry, a still solid portfolio (with products like Jublia and Wellbutrin), 50 other product launches expected this year and with an eye on growing its business overseas, optimism and potential upside for VRX may not be ill-founded.
So, which way is Valeant headed? To be honest, your opinion is probably better than mine. What I would defend is VRX looks like a binary-style situation at this point in time.
I’d wager shares of Valeant could easily land in the single digits if buyers for the company’s franchises don’t step up to the plate soon. But if interest from private equity or other competitors does appear, $25 or even $30 in VRX stock isn’t out of the question considering debt relief and the value of its ongoing operations.
VRX Stock Daily Chart
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It hasn’t been an easy bottoming process for Valeant stock. Just when it appears maybe, finally this time VRX will reverse forcefully into an uptrend — another failed bottom enters lower stage right on the price chart of Valeant and shares buckle to new lows.
As I wrote in September, decent short interest and likely too many investors anxious for an easy rebound, meant needing to approach Valeant a bit more cautiously as a bull. My suggested strategy focused on income using an out-of-the-money put credit spread, but even that trade idea failed to work.
What’s next? With VRX down nearly 50% from when this strategist pitched the bull put vertical idea, it’s honestly hard to know if the latest double bottom incarnation will hold. If shares are unable to rally, “Oops … I did it again” could be a doozy and portend much deeper troubles both on and off the price chart.
VRX Strangle
Reviewing the Valeant options board and with shares at $14.86, the July $10 put/$20 call strangle is attractive. Priced for $2.35 per spread, the trader is buying a put and call to offset directional risk and instead betting on a significant price move, either up or down, in VRX stock. Expiration breakevens are $22.35 and $7.65.
Implied volatility in Valeant options is fairly reasonable right now as prices trade near 52-week lows and are supportive of long premium strategies like this, which otherwise can be expensive, albeit limited-risk propositions.
Further, with six months remaining for the July contract and decay also less of a concern, profits can more easily accrue on directional price movement in Valeant without requiring the stock to actually penetrate the expiration breakeven levels.
If positioning in VRX with a strangle does resonate with traders, one last piece of advice would be to adopt an extra layer of risk management and decide upon a percentage stop-loss such as 50% of the premium paid.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. 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. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
