Biotech giant Gilead Sciences, Inc. (NASDAQ:GILD) reported strong results late last week. Now with earnings risk removed, solid Navellier Ratings, chart and investor support apparent, it’s a great time to formulate a bullish options position in GILD stock.
Last Thursday night’s report marked yet another profit beat in a string of upside earnings surprises GILD shareholders have enjoyed from Gilead Sciences. By the numbers, the company easily topped profit forecasts by 57 cents on earnings of $2.89 per share.
Likewise, sales of $7.6 billion easily passed estimates of $6.9 billion. At the same time, Gilead raised its revenue guidance for the remainder of 2015 by $2 billion to a range of $28 billion to $29 billion due largely to the strong revenues generated from its line of hepatitis C drugs.
Lastly, Gilead Science’s solid report was punctuated by news the company will begin paying a quarterly dividend of 43 cents on GILD shares and initiate a $15 billion buyback program. Investor reaction was upbeat and supportive with GILD gaining nearly 4.5% to finish at $105.01.
GILD Daily Chart
How investors react to an earnings report and of course the actual company results, is typically a dicey affair. That said, both those unknown’s became positive factors and supportive for GILD bulls by Friday’s closing bell.
As the daily chart of GILD stock shows, shares are supportive overall and setting up nicely for higher prices. During 2015 shares of Gilead have been correcting from a hard pivot low established at the tail end of December.
Subsequent price action has been positive as GILD has produced upside breakouts of two resistance lines. During the past month and after breaking above the second, higher line, GILD has been in fairly tight consolidation of about 5% while confirming longer-term moving average and the former trend-line as technical support.
In Friday’s session, GILD finally attempted a breakout of the current consolidation on above-average volume. Shares finished off their highs at $105 and about 70 cents below the pattern pivot high of $105.75, which intraday was topped by a new high mark of $106.34.
The overall action looks good for higher prices in GILD. The one caveat we see at this time is the price run over the last couple years in biotech and the likes of the Market Vectors Biotech ETF (NYSEARCA:BBH). The mostly uninterrupted move over the past few years has fueled concern that a sector correction is overdue.
That correction is actually occurring right now and could be important for GILD bulls. A bearish monthly shooting star in BBH established in March triggered to the downside last month. Subsequent lows in April have produced a corrective dip of about 11%.
With shares of BBH now below the 50-day simple moving average, bullish investors in GILD will likely want the moving price line reclaimed before (and if) last week’s lows get taken out — if the correction is to have made a meaningful low.
GILD Volatility
Following Friday’s report, GILD options failed to produce a reduction or volatility crush in the pricing of its listed calls and puts. The expression, “it’s hard to squeeze blood from a turnip” might be applicable as underlying volatility is just off 2-year lows and implieds aren’t priced at a substantial premium.
Additionally, while pleasant-sounding and well-received earnings typically find premium sellers in the form of buy-write positions acting as a weight on the implieds, the solid and upbeat report coupled with Gilead being in the volatile biotech sector appear to be reasons for GILD option sellers to act less aggressively.
GILD Long Call Strategy
Checking the board, with prices diagnosed as cheap enough, buying an out-of-money Jun $110 call for $1.75 is attractive in conjunction with managing the long premium risk. With a delta just under 30, I’d consider exiting if GILD broke below $101.50.
The technical stop is set below Thursday’s bearish open in GILD and its moving average supports. My thinking is neither should be broken at this time. Further, if that were to occur in the near future, it would keep the loss down to about 50% of the contract’s cost.
Of course, the upside potential of the contract is theoretically unlimited. But in the real world, if nothing material transpires in GILD shares in the next couple weeks, proactive money management is likely necessary.
If GILD has mostly sat and failed to elect a price stop and the call remains unadjusted and out-of-the-money, a time stop to prevent premium from potentially whittling away to zero is worth considering.
GILD Long Bull Call Strategy
An alternative strategy that requires legs but less legwork of GILD shares is the Jun $105/$110 bull call vertical for less than $2 per spread. Again, using the $101.50 level as a stop makes sense as the delta count is very similar right now and technically speaking, shares of GILD would be less attractive when positioned as as bull.
On the other hand, the GILD bull call spread’s breakeven is around $107 versus roughly $111.75 and maintains a maximum profit of $3 above $110 thanks to the spread having hedged some its long premium risk — so the trader would invariably have more leeway in staying the course during a slower move higher.
As of this writing, investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon his observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
