This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Eli Lilly: Bearish Options Trade

Stocks in this article: LLY

NEW YORK ( TheStreet) -- Eli Lilly (LLY) reported mixed results from third-quarter earnings last week. The company reaffirmed 2012 guidance in spite of abysmal performance of their top drug Zyprexa and several other drugs losing patents next year. Despite these headwinds, the company has rewarded shareholders with a stock up over 20% year-to-date and a hefty dividend yield of 3.8%.

As the end of the year approaches, I think investors may seek to lock in Lily stock gains or aggressively sell calls against their positions. As such, I believe Lilly's stock price has topped out for the year with the strong possibility of a small sell off and range-bound trading between $47 and $52.50 per share over the next several weeks.

Here's a short-term bearish options trade that doesn't cost very much (or costs nothing) to take advantage of the Lilly situation:

Buy 20 NOV 47.0 strike Puts @ 0.24 = $480
Sell (20) NOV 48.0 strike Puts @ 0.39 = $(780)
Sell (20) NOV 49.0 strike Puts @ 0.63 = $(1,260)
Buy 20 NOV 50.0 strike Puts @ 1.00 = $2,000
Sell (10) NOV 52.5 strike Calls @ 0.44 = $(440)

Initial Trade P&L = $0

This is a Put Condor fully financed by the sale of a Call. Aside from commissions, the trade costs nothing. Lilly is an excellent option trader's stock given the deep liquidity in the options. This translates into extremely narrow bid/ask spreads that lowers the cost and increases the ease to enter and exit the trade.

In this trade, profit is achieved between $47 and $50 by expiration with maximum profit of $2,000 occurring between $48 and $49 by November expiration. The risk in the trade is to the upside as we sold the NOV 52.5 strike Calls to fund the purchase of the Put Condor. Losses begin to incur above $52.50 (by expiration) thus it is important to set a pre-determined risk limit prior to putting on this trade.

Pelz has no position in Eli Lilly.

To learn more about using options to trade biotech stocks, check out Tony Pelz's book, The Biotech Trader Handbook or subscribe to Chimera Research Group.

Tony Pelz was a trader on a major European bank's proprietary trading desk, responsible for a portfolio with limits of more than $200 million. Prior to proprietary trading, Pelz worked with several global investment banks in roles ranging from corporate finance, M&A to credit and business development. He is author of The Biotech Trader Handbook, 2nd Edition, co-founder of the small-cap biotech research and trading site Chimera Research Group and operator of PelzOptions.com. Pelz currently resides in Denver, Colorado where he trades for his own account.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,411.88 +12.21 0.07%
S&P 500 1,904.01 +17.25 0.91%
NASDAQ 4,316.0740 +57.6360 1.35%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs