Fundamentally I am not here to argue for value in Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA). It is expensive on a fundamental basis. Furthermore, it’s facing operational challenges and competition.
The quarter metrics were messy with shrinking margins, and the situation becomes less than ideal for bulls to buy the news. With the lack of buyers, the bears prevailed in a fantastic way, dropping the stock 25% in one day.
Oh and by the way, Teva cut the dividend.
So needless to say that the news was bad, really bad. Having said that, you’d think I am sharing a bearish trade today…
Not so. I trade most pharma stocks based on their price action more so than their fundamentals. Today my bet is on TEVA stock, not Teva the company, and it’s really just that — a bet, a speculative trade that it will find footing soon. The “when” is the real mystery, and therein lies the opportunity and risk.
The sector is always vulnerable to headline moves just from the nature of their business. This TEVA dip came from its operational reasons not specific drug headlines. So this is more so within management’s control. The good news there is that they can do something about it. The bad news is that management hasn’t been able to find a CEO.
Regardless of which side of the fence you are — bullish or bearish — it’s expectations that dictate how the stock moves. Expectations here are as low as they can get. Wall Street decided this report was not at all what they were expecting and they sold it in kind.
Click to Enlarge Since I am not using fundamentals as the basis of this trade, I want to use technical levels against which I can sell risk for income. But even there I have to go back over a decade to find relative lows. And that far back I can’t trust them much.
So today I initiate a bullish bet in TEVA knowing that I have a short leash on it. I will close it if the price action continues to be as destructive. I feel like this is a kitchen sink quarter, leaving not much else that could go wrong.
To do this, I use TEVA options where I don’t have to risk buying the shares at face value and without any room for error. At least there I can build a buffer.
TEVA Stock Trade Idea
The Bet: Sell TEVA Dec $20/$17.50 credit put spread where I have a 75% theoretical chance of yielding 20% on risk, but if the price falls through my strikes I suffer losses.
For those who are brave enough to own the shares, they can sell naked puts.
The Riskier Bet: Sell TEVA Dec $20 put naked and collect $1.5o to open. If the price stays above my strike I keep the premium I collect for maximum gains. Otherwise I accrue losses below $18.5.
Speculative investing carries a high chance of loss, so I keep my bets small in size. This way I don’t break my heart or my piggy bank.
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.
