Biotech stocks have traded violently for over a year. Amgen, Inc. (NASDAQ:AMGN) has seen multiple +/-20% whipsaws in the span of weeks from each other. So there is no shortage of uncertainty as demonstrated by the stock price. Yet, the story remains unchanged. But after sitting near highs, AMGN stock is down a bit this morning after reporting earnings after the bell Tuesday.
AMGN stock is down 2.5%, despite beating Street estimates. That means Amgen over delivered, yet for whatever reason, traders are not rewarding them for a job well done.
This is not news to me. I’ve been on record as saying that the short-term reaction to earnings is more gambling than investing and the move is not necessarily tied to the quality of the quarterly performance.
Unless management changes my thesis on its prospects, the bullish AMGN story is alive and well. So is it too early to catch the falling knife? No, but only if you use AMGN options, which reduces the need to be surgical with timing.
We are in an uber-bullish equity market that is setting new highs on a weekly basis. Furthermore, AMGN stock is not bloated. In a highly volatile sector it’s a relative value play that I can bank on. There are also technical reasons for optimism.
Amgen stock has a trailing price-earnings ratio of 17, which is the lowest of its competitors. Furthermore, its P/E is low even on an absolute basis. Not only is AMGN cheaper than its competitors, it has a 33% net profit margin much higher than most other. Compare that to the 15% margin of Pfizer Inc. (NYSE:PFE) and its P/E of 28.
So owning it even at these levels are not likely to be a giant financial faux-pas for as long as their business model remains the same. This will play an important part in my trading strategy. As an added bonus, AMGN also pays a dividend.
I don’t usually chase rallies when the stock is near highs, but in this bull market I am willing to make an exception for AMGN stock. But that doesn’t mean that I will risk $177 buying the shares at face value.
Click to Enlarge Instead, I will sell puts below below support to generate income. It’s usually best to do this on red days to get the most out of the premiums offered. I come into this trade with profits already in hand from one I shared two weeks ago.
The Trade: Sell AMGN Sept $160 put and collect $1 to open. Here I have an 85% theoretical chance of success. But if price falls below my strike, I will own the shares and could suffer losses below $159. So as a worst case scenario, I would get long AMGN at a 9% discount from current levels.
For those investors who want more finite risk I can sell a spread instead. There I would buy the same number of puts below the ones I sell. This would reduce the absolute profits but also would greatly reduce the money at risk. This is prudent to do especially on earnings week.
The Alternate Bet: Sell AMGN 1 Sept $165/$162.50 credit put spread, which has still can deliver 20% in yield. This is without me needing to risking $177 to buy the shares at face value then hope for stabilization then a bounce to profit.
There are no guarantees when investing in the stock market, so I never bet more than I am willing to lose.
Learn options as easy as 1-2-3 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.
