Fundamentally, I cannot argue too much for value in GW Pharmaceuticals PLC- ADR (NASDAQ:GWPH). Stocks like GWPH are a leap of faith, which makes any options trade speculative. This leaves me trading the price action in between headlines.
Technically, GW Pharmaceuticals is volatile. In the past 12 months it has seen a 70% rally and several 20% pendulum swings, so it’s not for the faint of heart. To trade the stock using the equity requires incredible timing and a ton of luck.
Using options can make it easier, since I can build buffer zones that would allow for room for error. This way I don’t have to be surgical with my entry and exit points. Today I want to share a bullish setup that bets on continued upside volatility. I want to sell premium for income beneath proven support.
Then there is the political aspect to consider. Since before the 2016 U.S. elections, pharma has been a political football. Most recently, the sector has been hostage to headlines. We are currently waiting for politicians to agree on what will become law under President Donald Trump.
Meanwhile, pharma stocks try to rally and the range has been tightening.
These stocks tend to trade in unison which is a good thing for GWPH. The stock is on the neckline of a bullish technical pattern that could carry it 10% higher or more. The $116 level would be the next logical upside resting place.
GWPH Stock Trade Idea
The Trade: Sell the GWPH Jan 2018 $55 put and collect $1.25 to open, where I have 90% odds of winning. If price stays above my strike, I get to keep the entire premium as my maximum gains. Otherwise, I must own the shares and would accrue losses below $53.75.
It is imperative that I be willing to own the shares — otherwise I should sell a bull put spread instead. There the risk is limited to the width of the spread minus the premium I collect.
The Alternate Trade: Sell GWPH Jan 2018 $65/$60 credit put spread for 40 cents, where I have about the same odds of success but with much smaller risk. Yet the spread can still deliver 8% in yield. Compare this with risking $107 here and without any buffer and hoping to profit from an 8% rally.
Selling options is dangerous, so I never risk more than 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.