[Options] Lilting Lillies

Sean McLaughlin
November 15, 2023

Today, a "darling" company in the media thanks to new obesity drugs and other good news hitting the media airwaves is selling off. In fact, its having its worst day relative to its sector peers in many years.

Someone forgot to tell Eli Lilly $LLY that a new bull market run may recently have gotten under way. Of course, it was already way ahead of the game. In fact, look at this long-term chart:

These aren't usually the trends I like to take the other side of.

But perhaps it's gone on a little too long and it's ready to pause and retrace?

This stock could get cut in half and the long-term trend would still be intact.

When we zoom in a little closer, we see a very notable (and sizeable) gap from this summer where the stock jumped from $450 per share to north of $500 per share overnight:

Call me crazy, but I think that gap is going to act as a magnet for prices over the next few months.

So we're going to get involved with a defined-risk, bearish bet.

Here's the Play:

I like buying a $LLY April 600/500 Bear Put Spread for approximately $35.00 net debit. This means I'll be long the April 600 puts and short an equal amount of the April 500 puts:

While our risk is defined, our upside is also capped. But that's okay because I'm capping our profit potential right at the level where I think the stock may run into some support.

My trade management here is simple. As long as $LLY stays south of $620 per share, then I'll continue to hold this spread. If it's above $620, I'm out. My bear thesis will have been proven wrong.

If a trade north of $620 doesn't materialize, then I'll be holding for $LLY to trade down to $500. If/when it gets there, that's when I'll close the trade and book the profits -- whatever they may be.

If I'm still in the trade on April 1st (expiration month), then I'll aggressively trail a stop-loss level at a 3-5 day high print for an exit.

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

If you missed last week’s video Jam Session, you can catch a replay on Stock Market TV.

~ @OptionsSean

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: 323-421-7910.

Filed Under