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Collect on the Pharmaceutical Boom With Eli Lilly

Sell an out-of-the-money put write for quick income

Eli Lilly and Company (NYSE:LLY) provided optimistic guidance for 2020 today, and it looks like the stock will head higher at the open this morning. That makes this drug manufacturer an excellent target for a naked put write.

In fact, the entire pharmaceutical sector seems to be doing well. Since hitting a bottom in October, the sector, represented by the SPDR S&P Pharmaceuticals ETF (NYSEARCA:XPH) in the chart below, has risen by over 20%.

Daily Chart of the SPDR S&P Pharmaceuticals ETF (XPH) — Chart Source: TradingView

Pharmaceuticals are likely benefiting from the bullishness that has swept the market the past few days, but that doesn’t fully explain the massive gap higher in XPH this week.

Losing on USMCA, but Winning in the Senate

News out of Washington, D.C. has been mixed for pharmaceutical stocks.

Last week, Democrats in the House of Representatives announced they would support the United States Mexico Canada Agreement (USMCA), which is the renegotiation of the North American Free Trade Agreement.

But the Democrats asked for some concessions, and one of the things removed from the deal was related to prescription drugs called biologics. The provision would have extended the period that biologic drugs were protected from generic competition in Mexico and Canada.

But this minor loss didn’t stop the sector’s rise.

And another bit of news out of Washington, D.C. is probably helping these stocks take full advantage of investors’ bullishness. The bill to control prescription drug prices that passed the House of Representatives has moved to the Senate, where it will not pass.

While investors and the industry have expected this result since September, it does add fuel to the bullish fire. It means that prescription drug price regulation will be out of the news again, which could be bullish in the short term. It’s one less risk to worry about.

That, when considered with the general bullishness across the market, is enough to push stocks in the sector higher.

But to really understand the appeal of this sector, especially LLY, you need to look at the technical picture.

Finding a Bottom and Bouncing Higher

LLY is still well below its 52-week high at $132.13, but just like XPH, it has found a bottom, established support and bounced higher. If you look at the chart below, you can see that LLY’s support is around the $106 level.

Daily Chart of Eli Lilly and Company (LLY) — Chart Source: TradingView

Support in the $105-$106 range dates back to 2018, and after its most recent bounce, the stock consolidated in a bullish “flag” pattern before breaking above resistance in the $116-$117 range. Old resistance often becomes new support, so while it’s possible LLY will pull back slightly, I think its technical formation is promising.

In the short term, I don’t think much political news could hurt LLY, and its strong guidance should keep it above its old resistance levels.

According to the guidance released today, the company expects earnings per share in the range of $6.38 to $6.48 in 2020, which is above what analysts expected.

A put write that expires in January is a great way to take advantage of the stock’s strong performance without taking on too much risk.

Sell to open the LLY Jan. 24th (2020) $112 put at about $0.35.

Note: Be sure you are opening the weekly LLY options that expire on Friday, Jan. 24, 2020.

About Naked Put Writes

A naked put write is a bullish position in which you expect the price of the underlying stock to increase.

InvestorPlace advisor Ken Trester also brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.


Article printed from InvestorPlace Media, https://investorplace.com/2019/12/collect-pharmaceutical-boom-eli-lilly-lly/.

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