Biotech company Gilead Sciences (GILD) has had a strong year, with shares up 30 percent. However, shares have started to trend lower in recent sessions, and one trader sees a further drop ahead.
That’s based on the November $60 puts. With 193 days until expiration, 3,922 contracts traded compared to a prior open interest of 100, for a 39-fold rise in volume on the trade. The buyer of the puts paid $1.09 to make the bearish bet.
Shares recently went for about $78.50, so they would need to drop $18.50, or about 25 percent, for the option to move in-the-money. That price would also be close to the stock’s 52-week low of $57.17.
Despite the strong price performance in the last year, revenues are down 3 percent. Shares also trade at about 12 times forward earnings, about where they traded a year ago.
While shares could drop lower and retest their prior lows, the company is cash rich and debt free, and can potentially weather any economic concerns right now.
Action to take: Interested investors may like shares in the low $70 range or under. That would push the dividend yield on shares over 4 percent from their current 3.7 percent, and pay well for investing in the risks of a biotech company.
For traders, the put options play well to the stock’s current short-term trend. The options can likely deliver mid-double-digit gains in the coming weeks. But traders may want to take profits early given the volatility in biotech stocks.
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.