By Paul Price
(Dr. Paul Price is a regular contributor to Lowenthal Capital Partners. Read more about our newsletter, and take a free trial, here.)
Today’s sharp plunge in Bristol-Myers Squibb Company (NYSE:BMY) presents a great put writing opportunity for those who always wanted to own it, but hated to pay up.
As of 12:32 PM BMY was quoted at $ 64, off by $ 11.32 per share or (-15.03%) on the day. Note: as of 3:18 PM the stock was down a bit further, at $ 63.33.
“Less-than-optimal” clinical trial results on Bristol-Myers Squibb’s Opdivo lung cancer treatment drug helped shares of competitor Merck (NYSE:MRK), up $ 5.34 per share or + 9.25% (as of 3:21 PM) while sending BMY reeling. Here’s what BMY’s valuation looked like at today’s price but before adjustment for the news.
While not yet bargain-priced BMY’s multiple is down to about 25x its 2016 estimate, the lowest level since 2011. At $ 63.33 it yields 2.40%.
BMY-believers are getting a chance to set up positions at the best absolute price since last March. Bristol is now well cheaper than its $ 70.90 peak in autumn of 2015, and its very recent high of $ 77.12.
The dip, along with elevated volatility, allowed put sellers to take in $ 9.00 for the long-term (Jan. 2018 expiration) $ 65 puts or more than $ 12 for committing to buy at the $ 70 strike.
Break-even points on those dropped to $ 56.00 or $ 57.93 respectively as of the 12:32 PM last trading prices.
Those worst case forced purchase prices equate to the best entry points since the very brief Sep. – Oct. 2015, or Feb. 2016 nadirs. Each of those proved to be great times to buy for those willing to trade BMY.
As with any option sale the maximum profit would be keeping 100% of all premium received. That would be $ 900 or $ 1,209 per contract, less commission, in the examples shown.
Sharp selloffs rarely persist on high quality names. The $ 56 break-even on the lower-priced put provides a 13.1% margin of safety even if the stock fails to rebound.
Days like this, on stocks like Bristol Myers, are a very good time to employ put writing.
Disclosure: No positions in BMY.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
No comments:
Post a Comment