No doubt Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is still considered junk by some investors. Yet some might contend the price chart of VRX stock points to the possibility of shares being “head and shoulders” above many others. Let me explain.
This week analysts at S&P Global Ratings, announced Valeant’s debt is still deep in junk territory. The credit agency reaffirmed the drug manufacturer’s single-B rating.
The rating is only one notch above triple-C and it is saved for those corporate situations with serious threats of a company defaulting on its debt obligations. That of course wouldn’t be good for VRX stock.
The S&P update was prompted by Valeant, issuing $1.0 billion in new 8-year senior secured notes to repay an equal amount of senior unsecured debt from issues maturing in 2020.
But could the latest move be a case of one hand washing the other and helping Valeant come out looking clean? It could and even the S&P notes the transaction is a modest credit positive.
More to the point, only time will tell how Valeant’s ongoing turnaround efforts play out in a very complicated and still obviously speculative investment. For now, however, one inverse head and a couple of shoulders continue to shape up on the VRX stock price chart, while maybe, one hand washes the other.
VRX Stock: Daily Chart
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Shares were a bit higher by about $1.00 or 7.5% and challenging price resistance from the 50-day simple moving average and tightened, flat Bollinger Band.
Looking forward, the current set-up offers a nice risk-to-reward profile within the bullish pattern, if VRX stock can take out Tuesday’s high through resistance for a second attempt at a breakout. Using a technical stop below the shoulder low of $12.89, I’d estimate risk-to-reward potential of at least 3-to-1 and possibly much more if an eventual breakout of the neckline occurs.
VRX Stock: Bullish Modified Butterfly Strategy
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After reviewing the VRX options board, one lower-risk spread, which looks attractive for bullish contrarians, is the modified Nov $15 / $17 / $18 call butterfly for up to 40 cents.
As with a traditional long butterfly, below the lowest strike, the spread will collapse to $0.00 at expiration. Thus, if Valeant remains below $15, the debit of 40 cents will be lost. That’s the equivalent of about 2.5% VRX stock risk.
As traders familiar with Valeant know, that isn’t a lot and it all but removes the very real headache of a larger bearish price gap.
On the upside, above $15.40 and on an expiration basis, the position begins to turn a profit. Similar to a regular butterfly, the sweet spot is at the middle, sold call strike. In this instance, at $17 in VRX, the trader can capture a profit approaching $1.60 per spread.
Unlike the typical butterfly with its symmetrical construction, in the event VRX rallies even more strongly, the trader will keep a profit of 60 cents above $18 and the highest strike call wing. That’s due to the intentional design of the two embedded verticals of varying width, which favors bullish positioning.
Bottom-line, the trader may not be as happy as he or she is at $17, but with 60 cents in the pocket and a return of 150% for holding a lower risk play through earnings, this bull is far from being at a loss in more than one way.
Disclosure: 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!
