After years of growth, Celgene Corporation (NASDAQ:CELG) has spent the past eight months suffering from ever-weakening price action. But ‘all good things must eventually come to an end.’ And for those still bullish on CELG a modified fence strategy is the smarter way to position and profit from an overdue change in CELG stock. Let me explain.
Weak on good news, down on bad news. The situation for CELG stock investors has simply been a downer the past few months. In fact and with shares of Celgene now off a full 50% from 2017’s all-time-highs following Monday’s 4.70% price drop, you could say bears have been acting with barely any hesitation in CELG stock.
The latest ‘disappointment’ in shares of Celgene, judging by Monday’s price reaction, is a report that Celgene’s top dog of business development discreetly retired over a month ago. According to analyst Brian Abrahams at RBC though, the exit wasn’t a surprise inside the company and in fact, was well-managed and prepared for ahead of time.
Monday’s confirmation of the executive departure should have been a welcome event for investors. With Wall Street concerned Celgene’s blockbuster Revlimid franchise will fall victim to generics, investors have been vocally disappointed with the company’s existing business development strategy and failure to put together a plan of action compensating for the forthcoming and potentially large sales loss.
So, what’s next for CELG stock? Truthfully, Celgene could announce the cure for cancer right now and shares could tumble further given today’s overly-bearish sentiment in shares.
But while Celgene’s existing overly-bearish sentiment may not be finished, the sickly conditions in CELG stock do appear to have created a steep enough discount to consider an even better-placed CELG options strategy for contrarian bulls.
CELG Stock Monthly Chart
As mentioned, CELG stock has come a long ways from its recent highs over the past several months. But the aggressive and bearish price action may be close to over and an opportunity for investors to begin accumulating the name.
Currently shares are testing the 50% level of Celgene’s life as a publicly-traded company, as well as a slighter — but significant — 62% support dating back to 2012. CELG’s challenge of two key bottom-lines don’t necessarily point at a picture perfect bottom, but it does strongly support the wisdom of buying when there’s blood on the streets and panic in the air.
CELG Stock Bull Call Spread
I view this as an opportunity in CELG stock, but not one where a precise and bullish turnaround in shares is expected to miraculously occur overnight. Therefore, a longer-dated modified fence makes sense.
A modified fence combination purchases a call vertical and sells a put vertical in the same contract month to finance all or part of the cost of the entire position. Using this type options combination allows bullish CELG stock traders to position defensively without risking possibility of being left on the sidelines in the event our technical forecast is simply off-the-mark.
Reviewing CELG’s options, your best bet is buying the October $80 / $85 bull call spread and selling the October $65 / $60 put spread. With shares at $74.69 the combination is priced for a debit of 65 cents or .80% of the risk associated with purchasing long stock.
The money maker is if the call spread goes fully in-the-money with CELG rallying above the purchased vertical. Defensively, as this position minimizes risk relative to shares, the modified fence can work well for investors’ looking to accumulate shares on additional price weakness, but with less exposure than owning shares of Celgene with no such price assurances.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. . For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
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