After a difficult 2018, investors may consider adding Tesaro (NASDAQ:TSRO) stock, an oncology-focused biopharmaceutical company, to their portfolio for the rest of the year. Specifically, there are three bullish plays in TSRO stock that I want to share with you, as each play could lead to impressive profits.
Year-to-date, Tesaro shares are down almost 55%, mostly due to management’s downbeat guidance at quarterly calls, low sales numbers in Zejula, its inhibitor drug for ovarian cancer and high operating expenses. Short interest has also been quite high for TSRO stock in 2018, as those bearish traders have aimed to profit from falling stock prices.
Yet, believers in the stock highlight the foresight of management in capitalizing on R&D opportunities as well as current rumors that either Roche (OTCMKTS:RHHBY), which already has a formal strategic alliance agreement with Tesaro, or Gilead (NASDAQ:GILD) will make a takeover bid on Tesaro stock. Such a merger would help either one of these companies increase both their R&D pipeline and their portfolio of approved drugs.
The TSRO stock price has stabilized since August, and the shares had a great day on Sept. 5, when they rose nearly 6% after the news that Tesaro had commenced the second stage of its Jasper study on the safety and efficacy of Zejula.
Those investors who pay attention to moving averages should note that the technical message has improved to a “buy,” while oscillators are giving a wider range of “neutral-to-buy” readings. Short-term support for TSRO is first at $36.6 and then at 35; meanwhile, short-term resistance in TSRO stock is first at $38.3 and then at $40. TSRO’s 52-week price range has been $25.62 (Aug. 6, 2018) — $129.64 (Sept. 29, 2018).
If you are also of the opinion that the executive management is going to improve its balance sheet further and that Tesaro stock is ready for a rebound on either technical and fundamental grounds or even a takeover bid, you may want to add TSRO to your portfolio this September. Depending on individual portfolio allocations and risk/return profiles, here are the three types of trades set up for TSRO stock (prices are based on Tesaro stock’s closing price of $37.69 on Sept. 21):
Three Bullish Strategies on Tesaro Stock
1. Buy 100 shares of Tesaro stock at a limit price of $37.69. You should expect to hold this long stock position for up to one to six months for an approximate 8-10% gain. You may consider placing a stop loss at about 3% below your entry point.
2. Use a covered call whereby you would buy 100 shares of Tesaro at a limit price of $37.69 and at the same time, sell a TSRO Jan 2019 $35 call option, which currently trades at $8.35. The $35 option is slightly in-the-money (ITM), offering more downside protection in case of volatility and a decline in TSRO stock.
This call option would stop trading on Jan. 18, 2019 and expire on Jan. 19.
Assuming you would enter this covered call trade at the closing prices on Friday, Sept. 21, at expiry, this trade would break even at a Tesaro stock price of $29.34 and the maximum return would be $566 at a price of $35 at expiry (excluding trading commissions and costs).
3. Sell a Jan 2019 $35 put option with a limit price of $5.45 — its closing price on Sept. 21.
This put option would also stop trading on Jan. 18, 2019 and expire on Jan. 19.
Assuming you would enter this put selling strategy at the closing prices on Friday, the upside is that you keep the premium as long as Tesaro stock closes above $35 when January options expire (excluding trading commissions and costs).
The downside is that if TSRO stock trades below $35 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $35 per share.
At expiry, this trade would breakeven at a TSRO stock price of $29.55.
The Bottom Line on TSRO Stock
I believe a rebound in Tesaro stock is coming. However, as prudent investors, it is always crucial to maintain a clear risk/return profile. Thus, if the rebound does not happen, a test of the previous lows and toward the mid $20’s level could be the next leg down.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
