Profit From the Valeant Pharmaceuticals Intl Inc (VRX) Death Spiral

This trade on VRX stock will deliver if Valeant keeps bringing the pain

The unending nightmare for Valeant Pharmaceuticals Intl Inc (NYSE:VRX) shareholders continued this week. Rather than cooking up some new horror, the company settled for one of its recurring themes: a fresh 52-week low. Indeed, VRX stock tagged $8.92 yesterday amid a high-volume, 5.9% plunge.

How Valeant Pharmaceuticals Intl Inc (VRX) Pain Is Your Gain

The squeals of worn-out longs could be heard way up in the cheap seats. Of course, it’s tough to find sympathy for these poor souls given the many warning signs and fire alarms that have gone off in the stock over the past two years.

Analyzing the price action of Valeant Pharmaceuticals at this point is tantamount to surveying the aftermath of a train wreck. It’s a bloody mess leaving little reason for optimism. The stock is submerged beneath every single moving average you can think of. Heaps of resistance loom overhead, making any and all rebounds incredibly suspect.

Volume patterns continue to weigh heavily in favor of sellers here. Distribution days pockmark the price action like lunar craters.

VRX stock chart view 1
Click to Enlarge
Source: OptionsAnalytix

If you’re wondering if VRX stock has been down here before, the answer is yes. During the depths of the 2008 bear market, Valeant bottomed at a lowly $6.65.

Perhaps that’s its next stop.

A Trade on VRX Stock

The odds continue to favor bearish plays here. Rather than short VRX outright and run the risk of an unexpected up gap that delivers monster losses, let’s consider a put play.

To reduce the overall cost, and therefore risk, a long put spread should do the trick.

Buy the Jul $9/$7.50 bear put spread for 65 cents or better. The max loss is limited to the 65 cent credit while the max gain is limited to the spread width minus the cost, or $1.85. If VRX stock sits above $9 at expiration, you will incur the max loss. If it falls below $7.50 you will capture the max gain.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

©2020 InvestorPlace Media, LLC