Celgene Buy Opportunity - Tactical Trading
November 03 2011 - 8:00PM
Zacks
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) $31.6 B
Celgene (CELG) $29.4 B
Biogen Idec (BIIB) $27.6B
Quest Diagnostics (DGX) $8.8 B
Cubist Pharmaceuticals (CBST) $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.
![](http://www.zacks.com/images/upload_dir/1320423458.jpg)
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.
![](http://www.zacks.com/images/upload_dir/1320423502.jpg)
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
BIOGEN IDEC INC (BIIB): Free Stock Analysis Report
CUBIST PHARM (CBST): Free Stock Analysis Report
CELGENE CORP (CELG): Free Stock Analysis Report
QUEST DIAGNOSTC (DGX): Free Stock Analysis Report
GILEAD SCIENCES (GILD): Free Stock Analysis Report
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