[Options] A 16-Year Trend Has Been Broken

Sean McLaughlin
February 12, 2024

Healthcare continues to lead to the upside. While we already have a bullish bet on a sector ETF, it's time for us to drill in a little deeper in search of more beta if this trend is going to continue.

Today's trade is in a name that has been performing great off its December lows and has also been in a longer-term bull market. But only just recently has it begun to outperform against the broader stock market.

Check out this chart of Merck $MRK:

Here's what my technical analysts had to say about it on Friday in the most recent Hall of Famers report:

Merck just made fresh all-time highs earlier in the week.

The consistent pattern of higher highs and higher lows tells us the stock is in a strong and steady uptrend. With what looks like a decisive upside resolution from a 9-month base that began last May, we can be long against the 261.8% Fibonacci level.

On a relative basis, MRK recently broke through a 16-year downtrend line versus the broader market, suggesting more outperformance in the future.

If we’re above 123, we want to own MRK with a target of 187 over the coming 6-12 months.

Despite pulling back in recent trading days, $MRK is still hanging above that 123 level and I like the potential reward-to-risk scenario that is shaping up in longer-dated call options. I'm going to take a smart bet that has smaller odds of success, but the potential for tremendous risk-adjusted returns if we get it right.

Here's the Play:

I like buying $MRK September 140 calls for approximately $2.55 per contract. This debit I pay represents the most I can lose in this trade and I'll size my position accordingly.  But I'll look to keep my losses smaller than that if either one of two possible things takes place:

  1. If $MRK sees a closing price below $123 per share. Or,
  2. If our call options lose 50% of their value.

In either scenario, I'm either early or wrong and I'll have no interest in sticking around to find out which one it is.

Meanwhile, as long as I can continue holding the calls, I'll keep the position on until we get to my team's upside price target of 187. If we get there, we'll be sitting on a greater than 17x return on our invested capital! At 187 (or above), I'll sell half of my position which will lock in some robust gains while leaving me the potential for even more.

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.

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