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Buy Bristol-Myers Squibb Co (BMY) Stock With No Fear

Bristol-Myers Squibb Co (NYSE:BMY) stock has had a tumultuous 12-month period. In January, it fell 20% but luckily for the bulls it recovered all of it within five weeks. Since then and after several +/-8% moves, BMY is up 12% in 52 weeks which is decent but still underwhelming relative to the iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) as a whole.

Buy Bristol-Myers Squibb Co (BMY) Stock With No Fear
Buy Bristol-Myers Squibb Co (BMY) Stock With No Fear

Source: A 4 via Flickr

On the one hand, fundamentally BMY is not expensive relative to its peers from a price-to-earnings perspective. It also has a decent balance sheet and runs respectable net margins so there aren’t any obvious issues. But on the other hand, the stock is not underpriced either. So I can’t in good faith point out an impending catch-up rally.

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Looking back 52 weeks. BMY is outperforming names like Merck & Co., Inc. (NYSE:MRK), Gilead Sciences, Inc. (NASDAQ:GILD) and Pfizer Inc. (NYSE:PFE) so I can’t ask more of it from that perspective. But perhaps it has some catching up to do on a year-to-date basis.

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Since there are no obvious signs of which way BMY stock will go, I want to profit without the need of a directional move. Therefore today I will sell downside risk against proven support to create income out of thin air.

Technically, the price action is definitely constructive just by looking at the chart. It’s rallied 20% in two months off a double bottom set on July 27th. So if there was a gross price misalignment in BMY price it’s been fixed by this move.I don’t like chasing rallies but I also don’t like to short a runaway stock just for the sake that it’s run so far so fast. That’s why I employ options where I can fashion setups where I can profit from a stock rally already in progress but with room for error.


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I don’t like chasing rallies but I also don’t like to short a runaway stock just for the sake that it’s run so far so fast. That’s why I employ options where I can fashion setups where I can profit from a stock rally already in progress but with room for error.

Bristol-Myers stock is acting like a momentum stock. On the way up, they appear like they perpetually appear due for a correction thereby scare most of us out of trading them. So it is imperative that I insist on a buffer zone when chasing them. Otherwise, I risk being late to the party.

For the past week, BMY stock traded in a tight range. What’s interesting, is that it’s doing this at a long-term pivot level that goes back almost three years. The bulls lost that fight 13 months ago and now they have the chance to reclaim it to use as forward support.

The Bet: Sell BMY Jan 2018 $50 put and collect 60 cents to open. This is a bullish trade which has an 85% theoretical chance that I retain maximum gains. But if the price falls below my strike then I will own the shares and accrue losses below $49.40.

Selling naked puts is not possible for all investors. But I can mitigate the risk by selling spreads instead. By selling a spread I limit the maximum loss.

The Alternate Bet: Sell BMY Jan 2018 $52.50/$50 bull put spread where I have about the same odds of winning. The spread would then deliver 20% in yield. Compare this with needing to risk $63 to buy BMY stock here and with no room for error expect more upside to profit.

In either of my setups, I can still profit even if BMY falls but not more than 20%.

A small worry is that BMY stock price is currently in the middle of the analyst price range. I believe in balance so, in theory, it’s close to the top end of the actual range. But offsetting this worry is that the analyst ratings are too bearish on BMY. This reduces the odds of downgrades. In fact, it somewhat increases the chance of surprise on the upgrades.

Even though I’ve successfully shared similar setups this year, investing comes with risk so I never bet more than I can afford to lose.

Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.

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