My indicators were starting to lean toward the bearish side earlier in the week, but they turned bullish during yesterday’s rally that took the S&P 500, the Dow Jones and the Nasdaq all to new record highs.
I can’t think of a better way to take advantage of the situation than by opening a bullish call option on Merck & Co., Inc. (NYSE:MRK), the healthcare and pharmaceutical company.
The S&P easily shrugged off the Iran news we talked about last week. After only a few days of consolidation, the index broke out to a new all-time high of 3,275.58 yesterday as tensions de-escalated.
Daily Chart of S&P 500 Volatility Index (VIX) — Chart Source: TradingView
In the chart above, you can see that the CBOE Volatility Index (VIX) collapsed back down below the 13 level this week.
After spiking above the 15 level for two days in a row during the escalation in tensions with Iran, it has now fallen back down toward the low end of its range.
You’ll also notice the arrow I’ve included on the chart showing the lower-highs that have formed on the VIX. This denotes the bullish trend we’ve been in since the fourth quarter of 2019.
Until we start to see higher-highs on the VIX — which would mean sustained readings in the 16-20 range — I think the bullish trend will continue.
MRK’s Recent Successes Outshine its Struggles
MRK suffered a loss earlier this week when it announced that a trial showed its lung cancer treatment Keytruda didn’t improve treatment of small-cell lung cancer in a statistically significant way. Keytruda is one of MRK’s most important drugs, which is why the news sent the stock lower.
Earlier this week, reports indicated that Republican Senator Chuck Grassley is pressuring Speaker of the House Nancy Pelosi to give up on her prescription drug bill and support his, meaning there is some bipartisan support for the idea of regulating MRK’s industry.
Both of these stories are worth considering when looking into MRK, but they also don’t show you the full picture.
Senator Grassely’s bill isn’t likely to pass anytime soon, even with Democratic support. His bill stalled after leaving committee in July, so it’s possible investors won’t see it as a realistic proposal.
And after the negative results of the Keytruda trial, MRK announced positive data in its trial of a bladder cancer treatment.
And even though Keytruda won’t be used to treat small-cell lung cancer, the drug received FDA approval for use in treating high-risk bladder cancer, expanding the drug’s market.
After falling earlier this week the stock, has all the fundamental conditions to head higher.
MRK is Ready to Bounce
If you look at MRK’s chart, you can see the stock’s drop earlier this week put it below $90, the bottom of the gap it formed in late December.
Daily Chart of Merck & Co., Inc. (MRK) — Chart Source: TradingView
The bottom of the gap didn’t hold as support when MRK fell, but the stock still found a bottom just below $89 per share. Yesterday, the stock pushed back above $89, but it hasn’t pushed above $90.
Expanding Keytruda’s market, especially after the disappointing trial results earlier this week, should encourage investors to jump back into MRK. If the bullishness continues, the stock could push back up to its recent resistance at $92.
Buying a call with a strike price at $92.50 will let traders take advantage of the push higher regardless of whether or not MRK can break above resistance.
Buy to open the Merck & Co., Inc. (MRK) March 20th $92.50 Calls (MRK200320C00092500) at $1.45 or lower.
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.