Don’t buy the pain meds Citi is prescribing in Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA). In our view, it’s too late to fill that order and this is a better occasion to take on a pick-me-up, contrarian position in TEVA with a bullish short-term options play. Let me explain.
Apologies are a rare bird with analysts on Wall Street, and for that I almost want to tip the hat for Citi’s actions in TEVA stock. Typically, a buy recommendation that’s underwater by let’s say 50%, 60%, 70% or more just gathers cobwebs or is quietly rejiggered into a less damning opinion.
But that’s not what happened Wednesday with Teva. The generics giant and Israel’s now-formerly largest company received a cut to “hold” accompanied by Citi analysts detailing how really bad business is — and in Wall Street vernacular, essentially telling investors they need to cut their losses and find a new risk asset for the portfolio.
Bottom line, I’d almost respect Citi for apologizing after having been long and wrong in Teva Pharmaceutical. However, by turning tail and warning conditions have soured only after a full-blown, blood on-the-street-style capitulation on top of an already disastrous couple years, my contrarian gut and price chart entrails suggest it’s a better time to get bullish on TEVA stock today.
TEVA Stock Monthly Chart
Since I last wrote optimistically of TEVA stock in early May, shares are off nearly 45%. A completed Fibonacci-based two-step pattern (point ‘D’), April doji candlestick, nearby support from the 62% retracement level and oversold stochastics ultimately proved technically deficient. For that I apologize.
Currently, as addressed and easily visible on TEVA’s price chart, deeper extremes are the order of the day. Shares are now testing the 76% retracement level and 162% two-step pattern extension on record volume indicative of capitulation.
There are no guarantees of course when it comes to a stock chart like TEVA. Charts and interpreting them aren’t fail-proof, even when it appears the odds are highly favorable, as they appear right now. Bottom line, this looks like a good spot for contrarians to go long. But to ensure that buy doesn’t become a nasty-looking hold, using Teva Pharmaceutical’s options makes sense.
TEVA Stock Long Call Position
While our May forecast proved wrong, what I don’t need to apologize for is the less than 0.7% of TEVA stock risk laid out as part of a limited-risk short-term bull call spread. Far from catastrophic, the very small loss, among other benefits, allows for the opportunity to buy when others are panicking.
Today and after reviewing TEVA’s stock options, the out-of-the-money Oct $20 call is priced for 48 cents with shares at $17.48 and, in the scheme of things, viewed favorably as a good spot to start with a speculative long position.
If TEVA begins to rally and moves higher by let’s say 5% to 7%, I’d look to reduce premium risk and adjust, most likely, into a vertical. The less than 3% equivalent stock risk of this call is attractive, but ultimately implieds are a bit elevated and it would be nice to lock down potential losses further without regrets of having traded the position too cautiously in a capitulation type scenario.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. . For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits and feel free to click here to learn more about how to design better positions using options!