The biotech sector has had an interesting 12-month period: the rhetoric of U.S. elections and now into the Trump era. So considering the barrage of headlines, it’s no surprise to see that Amgen, Inc. (NASDAQ:AMGN) stock has been through a huge 52-week range.
Except for brief periods of time, AMGN stock has moved in stride with the sector itself. Technically, Amgen bears overshot down on last October’s earnings, then AMGN stock bulls overshot up on the rebound, which is a normal pendulum effect.
Click to Enlarge This seesaw action is not unfamiliar to the sector as they tend to suffer through periods of headlines; some sector-wide, others self-inflicted.
Fundamentally, AMGN stock is cheap from a price-earnings perspective and relative to its competition. Management has a good record beating earnings expectations, yet most analysts currently have it as a “hold,” and therein lies part of the opportunity.
While I said that the stock is cheap from a relative value, this is different than saying I’d risk $160 per share here to buy it. I am not that brave and I would definitely require some room for error. To do that, I usually resort to trading Amgen stock using options instead. This doesn’t absolve me from needing a thesis, but it’s the implementation method that changes.
I am one to believe that extreme levels are usually overshoots so the 12-month highs and lows were undeserved, and somewhere in the middle lies the truth. Currently AMGN stock sits smack in the middle of the range, so it’s in theory closer to fair value by definition.
Today, I want to share a trade to generate income by selling risk against proven support levels and this equidistance from high/low extremes would make for a decent starting point.
The Bet: Sell the AMGN Jan 2018 $115 put for $1.50, which has a 90% theoretical certainty that I would retain maximum gains. But if price falls through my strike anything below $113.50 per share would accrue losses for me.
With a 28% price buffer, I’m confident that I would be able to manage my risk against short-term price gyrations. Yet, it’s a good idea to buy cheap sacrifice puts to temporarily guard against the crash scenario.
Selling naked puts is not suited for everyone, so I could still accomplish the trade using spreads instead. By selling a spread I greatly limit the risk size yet still have a chance at yielding 9% on it.
Compare this with risking $160 now to buy the stock then need it to rally to $173-plus to match the performance of the sold spread.
Learn how to generate income from options here. 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.
