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Here's A Bullish Options Play On Gilead

With the markets in turmoil over the coronavirus, no stock has embodied the unpredictability of today more than Gilead Sciences (NASDAQ: GILD). 

Benzinga · 05/12/2020 18:28

With the markets in turmoil over the coronavirus, no stock has embodied the unpredictability of today more than Gilead Sciences (NASDAQ: GILD). 

Thanks to its antiviral drug Remdesivir, which has been granted emergency use authorization by the FDA for treading COVID-19, traders have made the company one of the most volatile names on Wall Street. 

The green line on this chart shows GILD’s implied volatility (the forecast of a future expected move) dating back 12 months. The gold bars represent options volume. 


Source: Market Chameleon

As of this writing, GILD’s implied volatility is 41.9. Even with a slight decline in recent weeks, GILD’s implied volatility has been lower than that just 21% of the time over the last year. 

With interest in the stock at an all-time high, here’s a bullish options strategy for options traders looking to bet on upside in GILD over the coming weeks. 

The Underlying Stock: Relative Strength

As you can see from the table below, GILD has largely outperformed the rest of the market (using the SPY ETF as a benchmark). Despite some short-term weakness, the stock has had high relative strength compared to the overall market. 


Source: Market Chameleon

The Options Strategy: Bullish Put Spread

The trade card below outlines a bullish put spread, a strategy of using put options to express a bullish point of view. 


Source: Market Chameleon

In this case, the strategy involves selling a put option with a strike price of $79 and buying a put option with a strike price of $75, with both options set for expiration on May 29, 2020. 

Based on Gilead’s historical price data, this put spread has an 81% probability of profit. Also, putting this spread on will leave you with a theoretical edge (the expected average return of the trade) of 26.8%. 

Payout Diagram


Source: Market Chameleon

The graph above is a payout diagram for the bull put spread at expiration. As you can see, if the stock price remains at the same level or stays higher than $79 (the strike of the put being sold) the maximum profit of $137 is achieved. 

If the stock falls below $75 (the strike of the put being bought) the maximum loss of $2.63 per share is realized (the difference of the two put strikes minus the original credit received of $1.50). 

The Takeaway: This trade is profitable as long as GILD stays above $77.63. Below that price, it will result in a loss. However, based on prior price and volatility history, GILD has an 84% chance of staying above the breakeven point by the time expiration hits, so you’re far more likely to end up in the green. 

All data as of the close on May 11, 2020

Image: Ivan Radic, flickr