I have a watchlist of biotech stocks that I like to trade. It's a mix of developed companies with strong drug pipelines and small caps with that lottery ticket potential. Here are some of my favorite names, shown with their market capitalizations from biggest to smallest...
Gilead Sciences (GILD - Analyst Report) $31.6 B
Celgene (CELG - Analyst Report) $29.4 B
Biogen Idec (BIIB - Analyst Report) $27.6B
Quest Diagnostics (DGX - Analyst Report) $8.8 B
Cubist Pharmaceuticals (CBST - Analyst Report) $2.3 B
Myriad Genetics (MYGN) $1.8 B
Raptor Pharmaceutical (RPTP) $233 M
Progenics Pharmaceuticals (PGNX) $210 M
Transcept Pharmaceuticals (TSPT) $114 M
I see one opportunity I want to trade right now. I want to buy Celgene anywhere near the 50-day moving average at $63. I just missed the dip earlier this week below $63.
So my strategy today is to create a synthetic long strategy using options. I am buying the January 62.5 call for $4.00 and selling the January 65 put for $4.15, for a net credit of 15 cents with the stock trading around $63.50 this morning.
This position makes me long the stock from below $62.50 until January, since I had to pay no cash for the call. But since I sold the 65 put, which is another way of going long stock, I have to post $6,500 in cash to secure my obligation.
And if CELG is below $65 anytime up until expiration, I could be assigned and forced to buy the stock at that price. For this reason, you want to treat a naked put position like this as if you are long from the strike price of the put. It has all the same risk as being long the stock already.
A slightly more conservative trade would have been to sell the 60 put and buy the 65 call. This would give me a little more room not to be assigned on the put and could have been done this morning for about a 30 cent debit. But my profit potential would have suffered and I might as well just buy the stock for $63.50 since the capital requirement is nearly the same (depending on your margin account privileges).
And if you want a better edge on a CELG trade, you should wait and see if it pulls back to $60. But I'm confident about CELG moving higher from here because the earnings growth and rising estimates, plus the technical price strength, give me an edge at this pullback level that I like.
If CELG can continue its multi-year breakout above $65 on this momentum, we should see $70 by early January. Stay tuned for opportunities in the other biotech names on my hitlist.
Kevin Cook is a Senior Stock Strategist with Zacks.com