Shares of drug manufacturer Novartis (NVS) are slightly up over the past year. One trader sees a further rally occurring in the first half of the year.
That’s based on the July $85 calls. With 197 days until expiration, 3,071 contracts traded compared to a prior open interest of 119, for a 26-fold rise in volume on the trade. The buyer of the calls paid $8.30 to make the bullish bet.
Shares recently traded just under $91, meaning the options are more than $5 in-the-money already. That makes the premium on the options far lower than stated.
It also means on a further rally that the options will likely see mid-double-digit gains, especially as shares would likely need to break over their prior 52-week high of $94.26.
The drugmaker could continue to deliver gains. Shares are inexpensive at 9 times forward earnings. While revenues dipped 4 percent last year, that’s held up better than many other parts of the market. And the company has a hefty 42 percent profit margin.
Action to take: Long-term investors may want to consider buying on a dip. Shares yield 3.7 percent, offering income on top of likely slow and steady long-term gains over time.
For traders, the in-the-money calls are a bet that the stock will continue with its longer-term uptrend currently underway, even amid a bear market. Investors can likely get mid-double-digit gains from the option.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.