Following a volatile earnings reaction, there’s more reasons than not both off and on the price chart to see the path of least resistance as up at biotech Biogen Inc (NASDAQ:BIIB). But for bullish-minded traders, a well-placed long-call vertical spread in BIIB stock is what seals the deal. Let me explain.
It wasn’t a perfect report and it certainly wasn’t the easiest of gains, but BIIB stock did manage to finish up over 2% after all was said and done in Thursday’s session. Some of what was said regarding Biogen’s Q4 results allowed for the company to top sales estimates, raise its full-year outlook above Street views and even seal a deal for a smallish experimental brain disorder drug for up to $217 million.
As one analyst noted, “It was a pretty clean quarter” for Biogen. Yet some of what was done on the daily price chart appeared at times to take issue with BIIB stock’s results.
Intraday, shares began on a high note opening up by about 3% before quickly tanking into the red, then seesawing their way higher during the remainder of the session.
Were profit-takers or shorts behind the aggressive and early selling reacting a bit too sensitively to Biogen’s profit blemish, or maybe disappointment a larger deal wasn’t sealed? Without having speed-dial to those folks shorting or trimming positions out-the-gate, we’ll never know.
But given what’s been said and done off and on the price chart, this strategist sees the case for a rally in BIIB stock.
BIIB Stock Monthly Price Chart
Unlike the broader market, BIIB stock has undergone a massive correction of nearly three years in length. At its darkest moment in mid-2016, shares of Biogen were trimmed down by a bit more than 50% from its March 2015 all-time-high. That’s good news technically, as prior extreme bullishness was reset to a more neutral and bearish state and should allow BIIB to move higher with greater ease.
Currently and on the heels of BIIB stock’s earnings report, shares are testing the 62% Fibonacci level. Our view is today’s challenge should lead to a breakout higher within the right side of Biogen’s corrective cup-shaped base and ultimately fresh all-time-highs later this year.
BIIB Stock Bull Call Spread
One spread of interest in BIIB stock is a slightly out-of-the-money, bullish long call vertical spread. The combination requires only modest capital to open a position, effectively reduces and limits risk and offers an attractive risk-to-reward profile.
Reviewing the options board, a favored combination with shares at $353.74 is the March $360/$370 call spread for $3.60. The vertical is the equivalent of just over 1% BIIB stock risk below the purchased $360 call and requires shares to rally 2.7% by expiration in order to break-even.
Bottom line, this vertical could result in under-performing a long stock strategy as implied above. However, a 1% insurance policy in a biotech, even one of Biogen’s stature, is nice to have in place.
And if BIIB stock does cooperate technically, a potential max payout of $10 for $6.40 profit and return of 178% if shares rally 4.5% is a well-designed way to ride BIIB to even bigger gains.
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.