Shares of biopharmaceutical company Gilead Sciences (GILD) have rallied about 37 percent in the past year. One trader sees a pullback for shares in the weeks ahead.
That’s based on the March $86.50 puts. With 25 days until expiration, 6,508 contracts traded compared to a prior open interest of 236, for a 27-fold rise in volume on the trade. The buyer of the puts paid about $5.00 to make the bearish bet.
Shares recently traded close to $83.50, making the options about $4.00 in-the-money. Gilead is closer to its 52-week high of $89.74, but has started to decline in recent sessions.
Operationally, the company has fared reasonably well. Revenues have been flat over the past year, but earnings have jumped over 320 percent. However, that kind of move isn’t sustainable, and shares are richly valued in terms of earnings, sales, and book value compared to the past two years.
Action to take: Shares pay a 3.5 percent dividend here, but the payout ratio is high, and a drop in earnings could put that dividend at risk. Investors interested in the company can fare better by waiting for a pullback in shares.
For traders, the put options play well to the company’s recent slide. If it continues, the option can deliver mid-double-digit returns.
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.