This Day On The Street
Continue to site
ADVERTISEMENT
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

Eli Lilly: Bearish Options Trade

NEW YORK ( TheStreet) -- Eli Lilly (LLY - Get Report) 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.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

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
Stocks Under $10

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

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
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

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

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
LLY $83.19 0.00%
AAPL $113.29 0.00%
FB $91.01 0.00%
GOOG $630.38 0.00%
TSLA $248.48 0.00%

Markets

Chart of I:DJI
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 +1.21 0.06%
NASDAQ 4,828.3250 +15.6170 0.32%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs