If you thought you’re too late to profit from Valeant Pharmaceuticals’ (VRX) downfall, don’t worry. VRX stock is still in position to make bears plenty of coin.
Unless you’ve been stuck in some galaxy far, far away, you’ve certainly heard of VRX, its nefarious supplier dealings and possible accounting scandal.
Most investors have corporate gumshoe and short seller Citron Research to thank as VRX stock plunged roughly 40% a couple weeks back due to Citron’s finger pointing and scathing accusatory report.
Yet shares of VRX may have had your attention a bit sooner due to Hillary Clinton’s open criticism of sleazy price gouging at the expense of taxpayers by some pharma players.
But there’s still more to the bear case. There’s the debt load (6.3x EBITDA) from VRX’s “buy ‘em, fire them and raise those prices” spree that may still make VRX stock such a good short going forward.
For the record, VRX stock has its fans. Front and center is Bill Ackman of hedge fund giant Pershing Square Capital is in Valeant’s corner. It should also be noted that Pershing Square isn’t afraid to take on companies from the short side either.
Caveats aside, Ackman’s sometimes very public investment theses haven’t always panned out
. That’s bad news for Ackman, but in this case, great news for traders looking to profit from further decline in VRX stock.
VRX Stock Daily Chart
Ackman stated this past week that VRX stock would be worth $448 in the next couple years and has an 89% chance for upside. But so far, VRX stock has failed to lift itself from a three-month correction that has lost a punishing 65% of its value since August.
The refusal of VRX stock to move higher in spite of the massive plunge and apparent upside potential suggests Valeant hasn’t yet found a bottom. There’s always a chance the stock could hit $0 like Enron.
But without getting too ambitious, $55 to $67 in VRX over the next few to several weeks doesn’t look out of the question. The outlined downside price target consists of a decade-long breakout level, as well as a 78% Fibonacci retracement level stemming from VRX’s 2008, non-scandal, financial crisis low.
In our view, the price consolidation in VRX stock over the past two weeks is acting as a respite and allowing deeply oversold conditions to ease before VRX makes another leg lower.
Bears should be mindful VRX stock’s current consolidation is toiling loosely with the 62% retracement level, as well as price action that has completed a two-step pattern defined by leg AB matching leg CD.
Heeding this technical caveat, should VRX find itself back above $112 or so, it’s possible that a bottom could be developing sooner than expected.
VRX Stock Bear Put Spread
VRX stock’s options board just got a whole lot more interesting due to much stronger liquidity and tighter markets. But the December $85/$65 bear put spread for up to $5.50 looks attractive.
This vertical compares to an outright December $85 put in VRX for $8.50 and is favorable given sky-high implieds. However, the premium reduction of 35% does come at a price.
The max return of $14.50 is possible, but given VRX’s volatility, shares would have to be well below $65 and very close to expiring in order to capture a profit nearing those levels.
The good news for this bearish vertical is that a profit double or slightly higher would still be in the cards on a fast move lower in VRX stock. Additionally, should VRX manage to rip higher and move against this position, the trader may still be able to exit for a lesser loss of possibly $3.00 per spread thereabouts.
Losses, regardless of how big or how small, are never fun. But this VRX spread saves traders from the more open-ended risk of a bullish stampede.
Disclosure: 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 Christopher Tyler’s 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
