Valeant Pharmaceuticals Intl Inc (NYSE:VRX) still has its share of detractors. And to some extent, that negativity should be respected. However, a decent-looking bottom-line off and on the price chart of Valeant stock does appear worthy of a speculative bull call spread for contrarian-minded investors. Let me explain.
Late last month Valeant stock came out with its quarterly confessional, which featured an improving and profitable bottom-line of 98-cents-per-share. Yet, shares slumped 11% and remain down by about 12% in the two weeks since reporting. So, what gives?
Some might say Valeant’s earnings and sales were a tad light compared to Street views. And they were. But the real albatross hanging over VRX stock remains the potentially problematic $25 billion in debt. The specialty pharmaceutical concern is still early in the process of navigating a successful business turnaround following its well-publicized and problematic fall from grace.
Yet, while pessimism has grown despite Valeant growing its business’ bottom-line from the year ago period, an improving bottom-line on the VRX stock chart also supports embracing a more optimistic narrative — and one that is made stronger using Valeant stock’s options market.
Valeant Stock Daily Chart
You likely don’t need me to tell you the low shown in the provided daily chart was a painful and drawn out affair. But following the near two-year long decline of 97%, Valeant stock has established an uptrend or an “improving bottom-line” that’s offering bullish investors a lower risk spot “near” key technical supports.
I caveated Valeant’s current position on the price chart as the stock is modestly below the longer-term 200-day simple moving average. More importantly, with VRX’s heady price volatility, shares are viewed as still being in a favorable testing position without the worry of being a picture-perfect bull trap. And with a test of the 62% retracement level and a bit of artistic channel support in place, the case for bullish contrarians looks agreeable to this strategist.
Valeant Stock Bull Call Spread
As I’ve stated in the past, Valeant stock is simply too volatile and it has too much counter-gap risk to naively rely on a stop-loss. Fortunately, VRX’s listed calls and puts allow for much safer options than simply purchasing shares.
After reviewing the VRX options board, one lower-risk spread that’s favored is a simple bull call spread. Specifically with shares of Valeant at $16.08, the June $19 / $23 call combination for 47 cents is of interest. This type of spread requires Valeant stock to make good on the described technical promise and it smartly stays clear of taking on additional downside exposure.
For about 3% of the risk associated with holding VRX stock, this position allows for a potential return of $3.53, or 750% if shares are above $23 at June expiration. Given another earnings event is in the June contract’s life cycle — and if our assessed uptrend is going to reassert its technical strength, this spread offers a very advantageous means to capture that opportunity.
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.