For the past few months, Gilead Sciences, Inc. (NASDAQ:GILD) could not fulfill the technical upside promise. It threatened several times to stop its slide but failed. But then on June 16 it finally set a low that served as a 15% springboard rally into the earnings.
Last night, GILD report earnings and the stock is spiking toward $76. Although this is good news, I remain reserved with my optimism because I’d like to see it close above the recent high of $75.25 so it can use it as a floorboard for higher prices. Then it can fulfill the second leg of this breakout to $80.
Click to Enlarge Coming into the earnings, sentiment had also shifted in favor of better days to come from GILD stock, and I am one who likes to trade with the market sentiment. However, I do not like to buy and hope I catch a rally. Instead, I prefer to sell downside risk against value and/or proven support. Then I let time do the work for me.
This strategy will serve me well in Gilead’s case because of my cautious optimism. I don’t believe that this is a strong floor so I don’t want to be holding stock with no room for error. However, I wouldn’t mind collecting premium for free where the only cost is the risk of owning GILD shares at a 14% discount. In addition I fear that the markets in general could have a correction from all-time highs which will take GILD lower if that happens.
The upside of Gilead stock having fallen for so long without a major flaw in their business model is that it creates pent up energy built upon accumulating value. This is how you get to a price-to-earnings ratio under 8 when its competitors like Pfizer Inc. (NYSE:PFE) and Bristol-Myers Squibb Co’s (NYSE:BMY) are well into double digits. The benefit could be a longer rally than markets anticipate.
Two weeks ago, I saw this breakout coming and had two targets for GILD stock. So I placed a trade that paid me well already. It hit one of my targets and the second can start to unfold starting today. So for that I am resetting a long bet, knowing I have profits in hand.
GILD Stock Trade Ideas
The Trade: Sell Dec GILD $65 naked puts and collect $1.10 to open. Here I have an 80% theoretical chance of success where the price stays above my strike. Otherwise, I have to own the shares and suffer losses below $63.90.
Selling naked puts requires margin because my risk is open all the way down to zero. But I can mitigate the risk by selling a spread instead. By buying an equal number of puts as those I sell, then my maximum risk is capped well above zero.
The Alternate Bet: Sell Dec $65/$62.50 GILD credit put spread where I have about the same odds of success. If so then the spread would yield 18%.
Investing results are never guaranteed, so I never risk more than I am willing 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.
