If there was ever a doubt, the latest price action in Celgene Corporation (NASDAQ:CELG) should help ease those fears and usher in more investor cheer in the coming weeks. For investors sharing that vision, a CELG bull call spread can help capture additional enthusiasm without getting too carried away. Let me explain.
In this strategist’s opinion, Thursday was nothing short of solid confirmation Wall Street is more than a bit interested in owning Celgene. CELG stock tacked on 1.9%, with solid investor participation as the broader market spun its wheels Thursday.
What was behind the bullish move?
I suppose some investors may have liked what they heard or read as part of Celgene’s presentation at the Cowen Healthcare Broker conference on Wednesday? Or maybe UBS was an influence? The broker initiated coverage of CELG on Thursday with a “buy” rating and $140 price target.
Alternatively, is it possible Celgene investors felt some relief as “ObamaCare Lite” passed through two key House committees? If the hardline “repeal and replace” stance is eventually repackaged as “revised” legislation, could drug companies with targets on their backs for egregious pricing practices also find themselves in a better position to negotiate without too much harm to shareholders? Maybe?
What is known with more authority is this; investors can buy a best-in-breed in biotech right now. And that means buying CELG stock for its growth at a reasonable price — as well as a breakout that suggests slightly less reasonable prices in the weeks ahead.
CELG Stock Daily Chart
Back in November, in front of the presidential election, there may have been some doubt about CELG stock’s prospects. The area highlighted in yellow doesn’t exactly suggest bulls were going to stage a party. Nonetheless, this strategist was optimistic on shares of Celgene and wrote as much in an article at InvestorPlace.
It turns out the technical prognosis on CELG wasn’t for naught. A secondary down channel breakout was quickly followed by a massive-size Donald Trump effect bullish price gap which has gone on to build a constructive “W”-shaped base.
In Thursday’s session, confirmation for the bullish pattern emerged as CELG stock broke above its handle on heavier and above-average volume. The next test for shares will be a move through the highs of the base, but it’s expected it won’t prove much of a fight.
Looking forward, given Celgene’s large corrective move from 2015 into 2016 and described healthy base breakout, the former high of $140.72 set back in July 2015 and roughly 12% higher is a good initial price target for intermediate-term traders.
CELG Stock Bull Call Spread
Given our bullish outlook for Celgene and after reviewing CELG stock’s options, the April $125/$130 bull call spread is thought to be a reasonably attractive play.
Priced for $2.15 with CELG trading at $125.02, this bullish trader needs shares to rally by 1.7% to break even at expiration in April. Even with the April vertical’s shorter-term lifespan, that shouldn’t pose a problem for a breakout like Thursday’s. And realistically, nor should the required 4% needed to maximize the vertical’s profit potential of $2.85 and return of 133%.
Bottom line though, there are no guarantees shares of Celgene will move higher. The fact is even good-looking breakouts like the one in CELG stock can fail.
But as those failures can also be volatile bearish affairs, it’s nice to know that something other than a price chart has your back in containing and reducing risk when things don’t go exactly as planned.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
