This Bearish Trade on Zogenix Could Lead to a Big Profit

This is a good way to get downside exposure in your portfolio

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This morning, I am recommending a bearish trade on Zogenix, Inc. (NASDAQ:ZGNX), the pharmaceutical company.

My indicators are giving sell signals for the second week in a row. After one of the strongest moves in years — the S&P 500 has gained more than 16% in the first four months of this year — the index is starting to stall out at its prior all-time high levels in the 2,940-2,950 range.

The markets are all about supply and demand and, right now, there is a lot of overhead supply (resistance) at those levels. While market breadth, or the number of advancing stocks to declining stocks, continues to show strong bullish signs, we will probably see a longer period of consolidation or even a pullback before the market breaks decisively higher and begins another leg up.

We’re also entering the month of May, which is a notoriously bearish time for the market. I am looking for defensive plays right now, and ZGNX is a good stock to target.

ZGNX Isn’t Following the Healthcare Sector Up

Last week, I recommended a bullish put write on the Health Care Select Sector SPDR Fund (NYSEARCA:XLV). As you can see in the chart below, XLV recently found support just below $85 and has been heading up, but ZGNX isn’t following.

Daily Chart of Health Care Select Sector SPDR Fund (XLV) — Chart Source: TradingView

ZGNX manufactures drugs to treat central nervous system (CNS) disorders, and one of its drugs was delayed by the Food and Drug Administration (FDA). Specifically, the FDA  issued a Refusal to File (RTF) letter relating to ZGNX’s marketing application for approval of a drug that treats Dravet’s syndrome.

While ZGNX may recover over time, the 12-15 month delay of a new product is bound to cause problems in the near term.

ZGNX is Struggling to Recover

If we turn to ZGNX’s daily chart, we see that news of the FDA’s RTF letter sent the stock below support at $40. That level acted as resistance as the stock tried to recover, and ultimately ZGNX moved lower.

Daily Chart of Zogenix, Inc. (ZGNX) — Chart Source: TradingView

The stock found some support at $36, but it wasn’t able to get back up to resistance at $40. If ZGNX starts a downward trend, it could head back to its December 2018 lows around $34, giving us a chance to take profits. That’s why I’m recommending a bearish put option on ZGNX.

Buy to open the Zogenix, Inc. (ZGNX) June 21st $34.00 Puts (ZGNX190621P00034000) at $1.35 or lower.

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