A lower-cost options trade that wins if this cheap drug stock keeps making a comeback

Published Wed, Mar 13 202410:42 AM EDT

Let's analyze how to trade a drug stock that's made a terrific comeback and could have more upside from here. But there's a catch: The price of call options have become too expensive given the rally, so we need to think of lower-cost trade to bet on upside from here. In November, I called the bottom on Bristol-Myers Squibb (BMY) . Now that it's traded off those lows and started to outperform the markets, I have a follow-up trade. At the time, I suggested that BMY was at the tailend of its 1-year decline and 10 years of underperformance. After multiple FDA approvals and acquisitions over the past 2 years, growth is back in the cards for this century-old pharma company. The stock has now completed a bottoming formation and is outperforming both its sector and the market, which provides a lower risk entry to establish new exposure. BMY 6M mountain Bristol Myers, 6 months If we review a the long term chart, BMY has traded between $50 and $75 for the better part of a decade and recently has tested those lows as support. If we zoom into the price action for the past few months, we see that it's formed a bottom and recently broke out from this trading range above $53 and now set to continue into the $60's and potentially as high as $75 to the upside. This breakout has been coupled with both outperformance relative to its sector and the overall market, confirming the breakout. The fundamentals remain equally attractive as they did in November, with the shares trading at only 7.5 times forward earnings. That puts it at a nearly 65% discount to the S & P 500, despite expecting EPS and revenue growth that is only marginally lower than the rest of the market. This provides significant upside from a valuation perspective. The trade Options on BMY currently are very expensive, so buying calls are out of the question. The best way to reduce the overall risk is by trading a bull call spread. I'm looking out to the May expiration and buying the $52.50/$60 Call Vertical @ $2.80 Debit. This entails: Buying May $52.50 Call @ $3.30 Debit Selling May $60 Calls @ $0.50 Credit This strategy would risk a total of $280 per contract (5% of the stock's value) if BMY is below $52.50 at expiration and have a profit potential of $470 per contract if BMY is above $60 at expiration. DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.