[Options] Long(er)-Term Health

Sean McLaughlin
August 17, 2022

During our morning Analyst meeting today, the team was looking across a variety of asset classes and sectors to identify the current leaders, and those likely to continue tracking higher if the broader stock market rally is for real.

One sector that stood out starkly was Big Pharma.

There are some monster bases in the process of resolving higher here.

Here's a chart of three big Pharma stocks, $MRK, $PFE, & $BMY:

These stocks confirm that there is strength in this space and these are monster bases on the cusp of significant, longer-term breakouts.

We're already in a bullish play in $BMY that we entered back in late June. And this position keeps us participating until January. But given the significance of these two-decade-long bases, we'd like to give ourselves a longer duration to participate in the potential for a multi-month run.

Of these three names, right now we like Merck $MRK the best.

So we're going to look into $MRK January 2024 LEAP call options which give us the opportunity to take advantage of a potential hundred-dolla-roll!

Here's the Play:

I like buying $MRK January 2024 LEAP 100-strike calls for approximately $7.00 per contract. This is a defined-risk bet, where the most we can lose if we're dead wrong is this $7.00 we pay up front. Likely, if the trade isn't working, we'll have plenty of opportunities to limit our losses significantly.

We'll employ two stop-loss triggers on this trade.

  1. If $MRK sees a close below $87 per share, that is our signal that we're early or wrong, either way, we'll close the trade down to minimize the risk of any further losses.
  2. If our call options decrease in value by 50% (so, down to $3.50 per contract), then we'll exit the position to cut our losses.

In the meantime, I'll look to sell half of my position at a double ($14.00 per contract) if I get the opportunity. This would leave me with a half-sized position with ZERO net cost. In other words, a #FreeRide.

I love those situations. Especially when we have as many as 16 months to ride.

If you have any questions on this trade, please send them here.

ASO subscribers who missed last week’s live video Jam Session can catch it here.

~ @chicagosean

P.S. We do trades like this regularly. If you'd like to leverage Best-in-Class technical analysis into smarter directional options trades, try out All Star Options Risk Free! Or give us a call to learn more: 323-421-7991.

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