Generally speaking, I’m not a big fan of discussing biopharmaceutical firms such as Gilead Sciences (NASDAQ:GILD). While the sector is intriguing and offers bountiful opportunities, it’s also replete with pitfalls. One poor clinical outcome could derail the market value of the underlying company, posing significant risks. It’s also difficult to predict how these matters will play out.
Still, quantitative signals can provide important clues as to where a publicly traded biopharma may head next. For Gilead Sciences, its equity is flashing a bullish signal that most analysts are unaware of.
Currently, GILD stock is riding a “3-7” sequence: three weeks of upside mixed with seven weeks of downside, with a net negative trajectory across the period. This bearish-dominated sequence has materialized 49 times in the past decade. Notably, in 61.22% of cases, GILD generated a positive performance in the subsequent week, with a median return of 2.13%.
Essentially, the deck for GILD stock has turned hot. On any given week, the chance that GILD will rise is only around 52%. In other words, thanks to the 3-7 sequence flashing, bullish speculators have received nine percentage points of free odds. That’s good money that can potentially be put to use in a trade.
As stated earlier, there’s a strong possibility that GILD stock can pop 2.13%, potentially within a week or two. However, that would only mean that the security — which is trading at $100.34 at time of writing — may rise to $102.48.
Is that enough to get excited about Gilead Sciences? Probably not, and this is also the reason why a simple options strategy might not be prudent. For example, it’s possible to buy the $102 call expiring May 30. However, the ask (or premium) for this derivative contract is $2.44. That would mean GILD stock must rise to $104.44, just to break even.
While I’m near-term bullish on Gilead, a $104 price target might be a stretch. Fortunately, with multi-leg options strategies, speculators can expand their window of opportunity.
For the same options chain expiring May 30, traders can opt for the 100/102 bull call spread. This transaction involves buying the $100 call and simultaneously selling the $102 call. The proceeds from the short call partially offset the debit paid for the long call, resulting in a net debit of $124. Should GILD stock rise through the short strike price of $102 at expiration, the maximum reward is $76, a payout of over 61%.
Those who are really aggressive can opt for the 101/105 bull call spread. It’s an identical process to the above, except that the net debit paid comes out to $175. Should GILD reach $105 or higher on May 30, the max reward stands at $225, or a payout of almost 129%.
Primarily, the debit call spread strategy allows speculators to grab huge payouts from what amounts to be miniscule movements in the open market. However, prospective participants should also be aware that options tend to be all-or-nothing affairs. If GILD stock doesn’t cooperate, the trader runs the risk of losing the entire net debit paid to enter the trade.
