Trade of the Day: Eli Lilly (LLY)

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We are opening a new bullish trade on Eli Lilly (NYSE:LLY), the $106 billion manufacturer of pharmaceutical products. LLY skyrocketed higher after its last earnings announcement, in which the company not only beat revenue and earnings expectations but also announced it would be spinning out part of its Elanco Animal Health (NYSE:ELAN) division in an initial public offering (IPO).

Since the initial jump higher, LLY has been consolidating in a fairly tight range between ~$105 and ~$107.50, but we think this consolidation range could turn into a bullish continuation pattern now that Elanco has had its IPO.

Originally, analysts had expected LLY to price Elanco stock between $20 and $23 per share, but the company surprised Wall Street by pricing the stock at $24. Shares then opened at $32.25 on Sept. 20 when trading began.

This means that LLY received more than many were expecting for the shares it spun off, but the more than 80% of the company that LLY still owns is now much more valuable, which should boost LLY’s share value. When you couple this with LLY’s strong pharmaceutical development pipeline — which includes Trulicity, Taltz, Jardiance and Basaglar — we believe LLY has plenty of growth potential.

Based on the $2.50 height of the consolidation range the stock is in and the projected breakout point of resistance at $107.50, we are setting our initial price target for the stock at $110 and have chosen the $110 strike price to take advantage of that move.

LLY is scheduled to report earnings again on Nov. 6 and, while we will most likely not be in this trade at that time, we do anticipate seeing a slight increase in our option premium as implied volatility levels start to rise in the run up to the earnings announcement.

‘Buy to open’ the LLY November 16th $110 Call (LLY181116C00110000) for a maximum price of $2.30.

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