Gilead Sciences, Inc. (NASDAQ:GILD) stock suffered a nasty 50% correction from its $123 per share high. It finally found footing in June of this year. The slide started mid 2015 and the stock set a lower high and the lower low until it was finally able to stabilize around $64.00 per share. And therein lies my opportunity.
A stock price bottom that takes this long to set becomes a solid floor. In addition, it is a significant level because it has been in contention since 2013, over four years ago. It was then when the bulls broke out from it and have used it as support ever since.
In the past three months, Gilead stock rallied 25% off the aforementioned bottom. But it is important to note that the momentum faded around $85 per share. This is another point of contention that dates back to early 2014. So for now it looks like the bears will hold it has forward resistance.
Yet today I will share a bullish trade, but one that does not depend on the bulls prevailing and proceeding to higher highs. I will instead bet that the recent reaffirmed lows will hold for the next few months. I will not need a rally to profit.
For a while GILD was a hideous knife to catch. But now that it has reestablished its bottom I can sell puts for income and leave room for error.
I can only do this by using options so I don’t have to risk $81.00 buying the shares outright and without any room for error. This is important since yesterday GILD fell 4% on a headline. I will need all the support I can get for a stock this wild. I know that I cannot time my entries perfectly and that fits well with the way I trade.
Fundamentally, GILD stock is still cheap from a price-to-earnings perspective. Its P/E is under nine while those of Pfizer Inc. (NYSE:PFE) and Johnson & Johnson (NYSE:JNJ) are almost three times as expensive. So in this macroeconomic environment there is tangible value in my thesis.
Click to Enlarge Furthermore, the whole sector is abuzz with mergers and acquisitions. Add to it tax reforms which will include corporate cash repatriation incentives and we have the recipe for more animal spirit and higher stock prices. Investors will buy the dips and bears will hesitate to press the short side.
Aside from yesterday’s dip, sentiment had shifted in favor of GILD and I don’t think that will change soon. Analysts expectations are muted but they do expect higher prices for the stock. It is now trading near the lowest of Wall Street’s price targets and $7 below the average. Still I don’t want to chase upside performance. I’d rather bet on proven support to create income from nothing.
GILD Stock Trade Idea
The Bet: Sell GILD Feb 2018 $65 put and collect 85 cents per contract. Here I have an 85% theoretical odds of keeping my maximum gains. But it price falls below my strike then I accrue losses below $64.15.
To mitigate some of the risk of selling naked puts I can sell spreads instead.
The Alternate Bet: Sell GILD Feb 2018 $65/$62.50 credit put spread which, if it wins can yield 10% on risk. Compare this with buying the shares and expect a 10% rally just to match the performance of the spread.
Investing is risky so I never bet 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 as @racernic on twitter and stocktwits.