Of late, bears have taken charge in Valeant Pharmaceuticals Intl Inc (NYSE:VRX). But if you’re a contrarian, a speculative long is looking reasonable both on and off the price chart of VRX stock. Let me explain.
From VRX stock’s recent high of $18.17 in late July, it’s been a few very nice weeks to be short the former wunderkind drug manufacturer Valeant Pharmaceuticals. With shares of VRX now at $13.42 the hefty decline works out to 26%.
What’s behind the aggressive selling pressure? Much of it has to do with Valeant facing a recently filed civil securities fraud lawsuit, which seeks a whopping $80 billion in damages.
Valeant’s management has apparently been quiet on the suit, which appears to have acted as a drag for investors seeking information. However, analysts at Cantor Fitzgerald contend, more or less, if history is any indicator, Valeant will make it out through the other side in much better shape than today’s headline risks suggest.
Time will eventually tell regarding Valeant’s latest date in court. In the interim and on the VRX price chart, it’s our opinion bullish investors should be receiving compensation shortly.
Valeant Stock Daily Chart
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Currently, and after reversing the bulk of those gains over the last few weeks, shares of VRX could be establishing another and maybe more important low once again for bulls.
This time Valeant is testing the 50% retracement level of support with a mostly favorable stochastics setup.
If Thursday’s confirmation signal follows through to the upside, VRX could be on the verge of establishing a legitimate uptrend or similarly bullish, but more opaque, inverse head-and-shoulder pattern.
Net, net it’s our contention Valeant shares are offering investors a reasonable, but speculative, long idea.
VRX Stock Long Call Strategy
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As well, there were multiple opportunities over the course of a couple weeks when shares bounced around the $17 area with the spread priced upwards of 60 cents and a double in profit on the table.
Reviewing the board after Thursday’s session, and considering our optimism, VRX is poised to turn higher yet again, the Jan $16 call for $1 with shares at $13.41 look sensible as a way to position long.
Premiums are fairly priced relative to VRX stock volatility and trading in the lower quartile of its yearly volatility range and time is currently on our side. Those combined factors are supportive of a long call where time decay and volatility risk are factors to address.
Also a nice feature, the risk is contained to roughly 7.5% of VRX stock through January expiration. In of itself, that’s decent insurance, but especially reasonable, as Valeant and regardless of our view, is definitely a more speculative investment.
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!
