U.S. Markets closed

Supercharge Your Portfolio With Amgen, Inc. (AMGN) Stock

Nicolas Chahine

Even though Amgen, Inc. (NASDAQ:AMGN) stock has one of the best-performing charts I’ve seen, it doesn’t get the respect it deserves. From a valuation perspective, it sells at a sizable discount to its competitors. Its price-earnings ratio runs at least 40% cheaper than Johnson & Johnson (NYSE:JNJ), Pfizer Inc. (NYSE:PFE), Merck & Co., Inc. (NYSE:MRK) or Celgene Corporation (NASDAQ:CELG).

The price action in AMGN stock is constructive up 24% year-to-date. But it’s not a standout among its industry. The iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) is also up over 20% for the same period.

But even after this massive rally, I see upside potential in AMGN stock and I want to capture it for free. Biotechs are a hot target for investors. When the political landscape is free of rhetoric about taking down price-gougers, or M&A activity heats up, Wall Street goes on buying sprees in undervalued biotech stocks.

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

That’s what’s happening with AMGN, and I’m not just sitting on the sidelines — I’m going to profit as Amgen heads higher.

The recent acquisition by Gilead Sciences, Inc. (NASDAQ:GILD) rekindled the animal spirit in the sector. Wall Street now expects more buyout headlines, thereby placing a bid under the whole sector. This is highly supportive of my thesis in AMGN.

Click to Enlarge 
Buying the AMGN shares outright and waiting for the rally is too much risk without any room for error. I am not one to do that especially not after such a massive rally. Instead, I will resort to the options, so I can structure a trade set up that allows me to build a buffer in case my thesis is wrong.

I will use this hidden relative value to finance the purchase of upside calls.

The Bullish Bet: Buy AMGN Dec $200/$210 call spread for $1.60. This is my maximum risk. Here I need AMGN to rally past my spread before time runs out in order to profit $8 per contract.

To mitigate my risk, I will add a second trance that would completely eliminate my out-of-pocket expense. Then I’d be long AMGN for free.

The Bank (Optional): Sell AMGN Jan $160 put and collect $2 to open. This is also a bullish trade that has an 85% theoretical chance that price will stay above my strike. Otherwise, I have to own the shares at that price.

Taking both sides results in a credit into my account. This means that I would get paid to be long AMGN stock. In fact, as long as the price stays above the puts I sold I am profitable already even if the stock stalls. Any premium I collect from selling my calls would be pure profit.

Selling puts means that I am willing and able to own the shares. This is a method I employ often when I see value and proven support levels. Indeed I come into this trade with profits in pockets from several such strategies this year like this example.

Since there are no guarantees when investing in the stock markets, I never bet more than I am willing to lose.

Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.

More From InvestorPlace

The post Supercharge Your Portfolio With Amgen, Inc. (AMGN) Stock appeared first on InvestorPlace.