Biotech stocks have been a political football for over a year. The negative political rhetoric started during the 2016 U.S. elections. Candidate Hillary Clinton and now President Donald Trump both have persecuted the sector for unfair pricing practices.
Biogen Inc (NASDAQ:BIIB) stock managed to still be up almost 10% year-to-date. Yes, it is lagging slightly behind the iShares Nasdaq Biotechnology ETF (NASDAQ:IBB). But that includes the mini 10% correction in October around its earnings report.
While BIIB stock has a high face value of $310 per share, it is not expensive. Its price-to-earnings ratio is half of Eli Lilly and Co (NYSE:LLY) and Merck & Co., Inc. (NYSE:MRK). It is cheaper than most of its sector.
The political pressure from President Trump’s promise to go after the drug companies still lingers. As long as POTUS’s rhetoric against healthcare continues, buyers of BIIB stock will hesitate.
While many traders would prefer to avoid the sector, I see this as normal risk. This is a sector where companies can have game-changing headlines on a daily basis with or without political intervention. So it’s not a deal breaker for me.
BIIB has tangible value and therein lies my opportunity.
Click to Enlarge I bet that I can sell downside risk against proven support to generate income out of thin air in the next two months. In doing so, I risk owning shares at a discount. This would not be such a terrible outcome. I am fairly confident that I will be able to manage out of that with minimal damage, if any.
Political worries could have upside side to it. The longer politicians take to implement any corporate tax cuts and repatriation havens, the higher the odds of consolidation in the sector, and that is a tide that lifts all boats.
Case in point is the sector move on the recent acquisition headlines from Gilead Sciences, Inc. (NASDAQ:GILD). This fact makes it harder to short stocks like BIIB, thereby leaving it easier to drift higher.
Nevertheless, I am not buying into a theory based on hopium. My strategy to trade Biogen stock doesn’t require a rally to profit. The upside potential would certainly expedite my profits but I am not dependent upon them to happen.
Technically, BIIB stock has established a floor in the last few weeks and I will hide below it. I do this knowing that $305 per share is a critical area for the bulls to hold.
BIIB Stock Trade Idea
The Bet: Sell BIIB Jan 2018 $270 put for $2.40. This is a bullish trade which does not require a rally to profit. Here I have an 85% theoretical chance of success. But I would accrue losses below $267.60.
Selling naked puts carries big risk, especially for a stock as frothy as BIIB. For those who want to mitigate it, they can sell a spread instead.
The Alternate Bet: Sell the BIIB Jan 2018 $275/$270 credit put spread where my risk is limited. Yet if the spread wins, it would deliver 12% in yield.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose
Get my newsletter for free 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.