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Jill: I have been in this business for 17 years (at least, in this trade, the old man (Skip) makes me look young) and there are some things that still never cease to amaze me. One of those things being the frenzy created around 13F filings, which reveal the public equity holdings of the firm as of the END of the quarter. Read: The position could have been flipped already! The whacky moves derived by the filings is a momentum traders wildest dream, but really means nothing to the long-term, fundamental investor or the trader that properly positions an investment opinion utilizing options. Sometimes shorting the move off the frenzy is a great, contraian play, but that is a conversation for another time.
Paul Tudor Jones founded Tudor Investment in 1980 and has a net worth over $3 billion. His fund focuses on short-term trading and charges a fee that is above industry standards, charging a 4% management fee and 23% performance fee, compared to the standard 2-and-20 structure. Tudor recently filed its 13F with the SEC, which reveals public equity holdings of the firm as of the end Q3. I was surprisedby some of the holdings but the following analysis and trade Skip and I recommend somewhat coincide with a relatively short-term thesis.
Tudor increased its Allergan (AGN) stake by over 100% in Q3, making the healthcare company the fund's fifth largest stock holding. The big-time biopharma player expects to see new growth from its diverse product pipeline despite weak sales in Europe. Consensus expects that AGN's 14% five-year annual EPS growth should be driven by a Botox product. At a 27x trailing P/E, AGN is on the high end of the industry, but its forward P/E of 20x makes the stock an appealing value play. Check out Skip's technical analysis and you will see exactly what I am getting at. From a fundamental perspective, AGN is relatively secure mid- and long-term growth prospect holding. The company has the opportunity to get Botox indications expanded (TG for the Housewives series), and its eye care division is well placed for stable growth amidst favorable demographic changes.
Skip: AGN has a nicely trending chart pattern seen on various timeframes such as the one-year, two-year and five-year charts. AGN's 2012 high of $97 per share is also its all-time high, that level trading in late April. Since then AGN made an intermediate-term double top in early July, then quickly sinking to $82 by August. As we move into and through this last period of 2012 AGN is once again trying to move towards par ($100) as I read its price pattern.
Back in March I wrote an article describing my rule of 92 Skidoo. In order to completely understand that rule I ask you to read or re-read what I wrote as it directly applies to the trade about to be offered here. Key to this rule is that the overall market sentiment should be bullish. Given all the yapping about the fiscal cliff, that sentiment/condition is not an easy decision to make for this current stock market cycle's attitude.
Consider a calendar spread in AGN designed to take advantage of the short-term condition of both the stock market and the stock as its value relates to the trading calendar. The shorted side of the spread is expiring in a few weeks (December 21st).
The trade is 100% risk controlled as well as using time and price as an ally. Only a quick, big move in price by AGN in either direction will hurt the spread and cause it to go awry. Should the shorted December out-of-the-money call (the 92.5 strike) expire (on December 21) worthless, then the position would morph itself into being a naked shooter call (the January 92.5), positioned for AGN to possibly attack that par level before that long call expires on January 18.
This trade is high in risk because the calendar spread's value can collapse quickly should AGN move up or down in price far enough away from the 92.5 strike. The reward potential is not known at this time, and is dependent upon how AGN is priced as it closes in on its expiry date relative to its price at that time.
Trades: Sell to open 3 AGN December 92.5 calls at $1.10 and buy to open 3 AGN January 92.5 calls for $2.10.
The total risk for the spread is $1.00. As always, I will monitor the trade on this site in the comments section below.
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