Celgene Corporation’s (NASDAQ:CELG) stock price is relatively flattish in 2017 but not without its drama. We saw a 15% rally followed by a 10% correction before reverting back to near the short-term mean.
Fundamentally, Celgene stock is not cheap. With a 44.5x trailing price-to-earnings ratio, it ranks high among its competitors. But P/E face value doesn’t always tell the whole story so it’s not a deal breaker for me. Furthermore, it doesn’t pay a dividend, so there is no help to the bullish thesis from that front.
Except for a couple of nervous Nelly analysts, most of those who cover it have a bullish bias on CELG stock. This could carry some downside risk from surprise downgrades. But history shows that usually management delivers on promises. They beat expectations at least four earnings reports in a row.
Technically, the range in CELG stock is tightening over the past three months. Price ping-ponged between $110 and $127 per share. Now it sits near balance at $118 awaiting for the next move where direction is unknown.
CELG doesn’t report earnings for more than a month, so in the meanwhile it’s likely to follow the general moves in markets and its sector specifically.
CELG Stock Trade Idea
Click to Enlarge The Thesis: Regardless of the direction of the next breakout, I bet that CELG stock price will stay above $100 through August. If it falls below that level, I would be willing to own the shares. I see potential supports are $114, $112 and $104.
So instead of buying the stock at face value and without any room for error, I prefer to sell downside risk against proven support levels to generate income.
The Bet: Sell CELG Jul 28 $100 puts naked and collect $1.50 per contract. Here I have a 90% theoretical chance of keeping my maximum gains. But if price falls below my strike I have to own shares and suffer losses below $98.50.
If owning the shares is not a viable option, I can use bull put spreads instead to accomplish the same goal.
The Alternate: Sell the CELG Jul 28 $100/$95 credit put spread, where I have the same theoretical chance of success to yield 11% on risk. Compare that with risking $117 per share and hoping for an 11% rally.
Selling options is risky business and I only risk what I can afford to lose.
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.
