Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) stock has been decimated over the years. It fell 75% off the highs of 2015. This morning the stock is rallying on the news that the famed investor Warren Buffett doubled his stake in Teva stock.
Wall Street loves to chase Buffett’s investments. He tends to buy for the long term, and he certainly does his due diligence beforehand, so the idea to mimic his investments is valid. After all, if Warren Buffet sees an opportunity in TEVA stock, so should we.
One thing this does to the stock, is that it places a bid below it. Meaning that if it falls, now Wall Street knows that Warren is in it. This helps it find footing on dips faster than it would otherwise … and therein lies my opportunity. I use TEVA options to generate income from this with no out-of-pocket risk.
Usually I like to invest this way into value. In this case I cannot argue that Teva is cheap from a traditional sense, so I consider this a trade more so than an investment.
After a series of disappointments, Wall Street experts gave up on the stock as most analysts are on the sidelines. Now we may see some who upgrade it, and that is more upside potential from here.
Technically, the long-term chart is ugly. In 2017 it fell to a low that it hadn’t seen for 17 years. Since then, it has been setting higher lows and bouncing against a pivot point that dates back to 2000. Today the stock is rising 3%. If it can take out $22 for share, bulls can overshoot higher to erase the nasty effects of last August earnings dip. The stock fell 40% from $32 per share.
This rally is not likely to be a straight shot to the moon, but I don’t need it to be. I merely need support to hold through 2018 to realize my maximum profit. But if price goes against me, I will need to own the shares at a discount from current price. I am confident that in this worst-case scenario, I would be able to manage out of them for a profit given the current macroeconomic conditions.
TEVA Stock Trade Ideas
The Bet: Sell the TEVA Dec $16 put for 60 cents. This is a bullish trade which does not require a rally to profit. Here I have an 80% theoretical chance of success, but I would accrue losses below $15.40.
Selling naked puts carries big risk especially for a stock as frothy as TEVA. For those who want to mitigate it, they can sell a spread instead.
The Alternate Bet: Sell the TEVA Dec $16/$14 bull put spread which has about the same odds of winning and would yield 12% on risk. Compare this with risking $21 per share here and without any room for error expect a rally profit.
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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.