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Trade of the Day: Eli Lilly (LLY)

Try puts on LLY to capture profits on the downside


Eli Lilly (LLY) has been on a roller-coaster during August, and it doesn’t look like the downhill part of the ride is going to be over for some time. LLY investors initially sent the stock rocketing higher on Aug. 13 when the company announced its lung cancer drug, Necitumumab, had met its Phase III goal of increasing survivability rates in those treated with the drug in combination with Gemzar and Cisplatin, compared to those who were treated with chemotherapy alone.

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Unfortunately for LLY bulls, many are questioning just how long the treatment increases life span, and whether the increased incidents of side effects like thromboembolism (blood clots) is worth the risk. As you can see on the LLY chart, the euphoria from the Phase III announcement quickly faded.

On top of all that, LLY is currently in the middle of a trial where the company is trying to convince a judge to extend the patent protection on Alimta — another lung-cancer drug. LLY claims that it has made a major innovation in the drug by administering it with folic acid and vitamin B12, and that innovation should qualify the drug for an additional five years of patent protection. On the other side of the table are generic pharmaceutical firms, like Teva (TEVA), who claim adding basic vitamins is not a major innovation and that Alimta should lose its patent protection when it was originally set to expire. Alimta accounted for around 11% of LLY’s revenue in 2012, so losing patent protection could put a major dent in LLY’s top and bottom line.

Now that LLY has broken below key support at $52, we anticipate the stock will continue to fall through support at $51 — ending up near the lows reached in June and July. The company doesn’t release its next quarterly earnings until Oct. 23, so we shouldn’t have to worry about that while holding this trade.

Recommendation: Buy to open the LLY October 50 Puts (LLY131019P00050000).

InvestorPlace advisors John Jagerson and S. Wade Hansen are co-founders of, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news.  Get in on the next trade and get 1 free month today by clicking here.

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