[Options] Getting Exposed to Healthcare

Sean McLaughlin
April 5, 2023

We kicked around a few ideas in this morning's Analyst meeting and the one thing that stood out to me is that I do not currently have any long exposure to the healthcare sector --- one of the strongest sectors out there.

That changes today.

We're going to get long a familiar name in the space, but we're going to do it carefully with a defined risk spread because we've got earnings coming up soon. So we'll go for a longer-duration trade and bet on earnings to be a catalyst for higher prices.

For some perspective on this trade, check out this long-term chart of Merck $MRK:

That base breakout makes me feel good about the broad direction of the trend. And this zoomed-in chart shows us that $MRK is looking like it's ready to start another leg higher:

Time to get involved.

Here's the Play:

I like buying a $MRK October 115/125 Bull Call Spread for an approximately $3.65 debit. This debit is the most risk we're exposed to if it doesn't work out:

The most we can gain is $6.35 if we held the spread all the way until October expiration. But I have no plans to do so. If this trade moves in our direction, I'll look to exit with profits when I can sell the spread for $7.30. This would be a doubling of my invested capital, without having to hold risk all the way until expiration. I like to take my "easy" profits and move on to the next best trade on the tape.

For risk management purposes, our risks are defined. We can't lose more than the debit we pay today. However, if we see a $MRK closing price below 108 at any time during my hold, that'll be my signal that I'm either wrong or early and I'll look to close the trade down for whatever premium I can salvage. I'd rather not take a 100% loss on my invested capital if I can help it.

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

ASO subscribers who missed last week’s video Jam Session where we reviewed activity in our options portfolio from the past week can catch it here.

~ @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: 323-421-7991.

 

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