After a nearly 10-for-1 price cut in Valeant Pharmaceuticals Intl Inc (NYSE:VRX) stock, shares have recently settled in a trough in the low $20s. VRX stock is far from its $263 per share highs, but it still attracts buyers on the slightest bit of good news.
Click to Enlarge My last effort at going long VRX stock was a nice and easy win. Today, I want to set a new bullish trade for a separate account where I need some healthcare exposure.
Fundamentally, I am confident enough that there is value for Valeant’s business model. Technically, VRX’s chart yields very few clues. So I am left with the price ranges we’ve seen so far and must sell against levels that seem dependable.
I usually don’t like to go long a stock on a big up day. Today, Valeant stock is up 6% on an upgrade. In this case, though, I’m looking to stay around for months. So timing a good entry isn’t as crucial as it would be for a shorter-term trade.
Going Long VRX Stock
The thesis is simple for this bullish trade: The worst for VRX stock is behind us. To execute this idea, I will resort to the options markets. I like to use options to go long on Valeant with a healthy cushion. I rarely set a trade without a healthy buffer, and you shouldn’t either. Leave room for error.
Trade No. 1: Sell the VRX Mar 2017 $15 put for $1.60 per contract. Ideally, I need VRX to stay above $15 per share through March 2017. My breakeven point would be $13.40 per share. While I am holding the trade open, I would be assigned the stock at $15 per share if VRX falls below my strike price.
I am not obliged to hold the trade through to expiration. I can close it at any time for partial gains or losses. Statistically, this trade has an 80% theoretical chance of success.
Trade N0. 2 (Optional Element): Someone that sees more upside potential could add another layer to the trade to capture more potential profits. The setup for this part is a straightforward debit call spread. Set enough time on the clock to be proven right. An example: Buy the VRX Jan $27.50/$30 debit call spread for $1. I stand to double my money if VRX stock rises through both legs by mid-January.
Don’t sell naked puts unless you’re willing and able to own the stock at the strike price sold. Also, never risk more than you’re willing to lose. In this case, I need some relatively speculative risk in this account. VRX offers me a good balance of speculation and decent fundamentals.
Usually, selling risk in a low-vol environment isn’t lucrative. But in this case, the headline risk potential in VRX stock keeps premiums relatively elevated.
Nicolas Chahine is the managing director of . As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at and StockTwits at .
