A crisis mode trade

By now I assume everyone in the market knows about the troubled company, Valeant (VRX). If you don’t, here is the brief summary in the Los Angel Time today: “Valeant's stock price surged for years, fueled by a strategy of gobbling up smaller companies and raising prices on niche drugs — bypassing the huge research and development investments typical of the drug industry. But the company's approach has drawn scrutiny from federal prosecutors, Congress and its own investors. Shares that traded above $260 around this time last year, fell below $25 in pre-market trading.” Yes, VRX is in a crisis mode, fighting for survival in the longer term. Today’s big miss in earnings has added further pain to it. With this kind of troubles involved, it is hard to believe anyone would be interested to hold this stock for long-term before it can truly demonstrate its survivability. Having said that, I think today’s poor earning event is actually making VRX a very good short-term trading candidate. Let me explain.



 You see, VRX is still a profitable company, generating incomes from selling drugs. Almost by all the valuation criteria, VRX is extremely cheap at the moment. While I’m not sure about its long term, I’m pretty sure VRX won’t simply fall apart in the next 2 weeks, which is the timeframe I’m talking about for the trade. Actually the recent price actions for VRX have pictured it a rather positive technical pattern, with a quite strong positive divergence for its momentum indicator, MACD. As I said many times, you should not follow the herd for trading as they are usually overacting to almost everything. Today’s price action for VRX further proves its technical strength that it has bottomed at least for now: It crashed to as low as $22.6 from $29 (over 20% plunge) but closed much higher, close to $25. This is typically a bottoming-type of action that the selling pressure has been exhausted.  Now with such bad news baked in and the bullish price action today, I really don’t think VRX will be below $25 by end of the next 2 weeks. So if you have the gut to sell VRX Jun 17 puts for $25, the chance is very high that you can simply walk away with the very inflated premium (about $1.3) as your 2 weeks income. This will translate to a 15-20% gain on the margin in less than 2 weeks.

But let me be very clear, there is zero interest for me to hold VRX for long term. This is only a very short term technical trade. Although I’m convinced this will be a profitable trade, there is certainly no guarantee. But even one gets put to buy VRX, it will only be losing money if VRX gets down to below $23 on Jun 17. With the very strong technical setup and overacting nature of the herds who are dumping the stock today, I really don’t think it will go down that far in 2 weeks!