Some may be tempted to declare “capitulation!” in Valeant Pharmaceuticals Intl Inc (NYSE:VRX) as one notorious and maligned bull bids farewell. Loathing aside, heavy debt and a burdensome Valeant stock chart suggests bears, not bulls or pigs are still in control of VRX.
Love him or hate him (and most arguably seem to dislike Bill Ackman), now is not the time to bet against the hedge fund manager and activist investor by picking up Valeant stock.
After a very long, painful and much-publicized campaign in shares of VRX, Bill Ackman announced this past Monday night, his hedge fund Pershing Square has exited Valeant Pharmaceuticals.
The investment in VRX has been more than an eyesore for the storied hedge fund manager. Over the past two years, Valeant stock has tanked nearly 95% from the firm’s initial purchase price of $190 to $11 a share. Even worse, exiting VRX required a massive liquidation of some 27 million shares. What’s more, the Valeant stake represented Pershing Square’s most concentrated bet and only magnified the loss, both on and off paper, for Bill Ackman.
But love him or hate him, thinking his company’s capitulation in Valeant stock, which admittedly required a “disproportionately” large amount of firm’s resources, means VRX is now free to rally; think again.
The fact of the matter is Pershing Square decision only came after a substantial year-long commitment to help Valeant sell key assets, establish a new management team and overhaul of the company’s board. As well and despite those efforts, there remains $30 billion in under-funded debt obligations.
Bottom line, if a storied hedge fund with an otherwise very enviable record of success over the past couple decades can’t justify staying the course, though they do have to answer to their dwindling investment base; it’s time to face the truth of an equally problematic chart in Valeant stock.
Valeant Stock Daily Chart
Looking at the daily chart of VRX and it’s obvious, to us at least, there have been occasions over the past year where Valeant shares deserved the benefit of the doubt — and even offered decent size, short-term trading profits to bulls.
At this point in time though, and without being too pessimistic, it would be hard to defend VRX stock. On a technical basis this week’s latest tumble put shares at multiyear lows and pointed towards the financial crisis low of $6.65 — and to be quite honest, maybe much lower in 2017.
VRX Stock Bearish Combo Spread
In reviewing the VRX options board and with shares at $10.96, I like the idea of creating a bearish modified spread. One combo of interest is selling the April $11/$12.50 call vertical and purchasing the April $10 put for even money.
If Valeant stock disappoints this bearish trader, the worst case scenario is a loss of $1.50 above $12.50 at expiration. That would require a complete reversal of this week’s bearish gap.
Looking optimistically lower on the price chart, if VRX shares remain wedged between $10 and below $11 a share at expiration, both parts of the combo go out worthless and the trader breaks even. However, an interim move towards the held put could produce paper profits. The position does maintain a bearish delta, or directional bias, when there’s still time on the calendar prior to expiration.
Lastly, if VRX stock dropped below $10, the combination would begin to trade just like short stock, but without the open-ended risk of that type of position. If that were to happen, I’d look to close the bear call spread and sell a portion of the long put inventory for even money. That adjustment would allow the trader to safely maintain the balance of his or her bearish long put position with no risk.
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.
