The pharmaceutical sector hasn't done much recently to attract
the attention of traders. The AMEX Pharmaceutical Index (DRG)
recently dropped below a trading range that had confined the index
for the last two months. However, despite the overall sector's lack
of excitement, there are some interesting investing opportunities
to be had within the group. You just need to dig a little
Allergan Inc. (
) is a leading maker of eye care, skin care, and similar products,
including Botox. The firm's eye care products treat glaucoma,
conjunctivitis, and chronic dry eye. Skin care products include
treatments for acne, wrinkles, and psoriasis. Allergan also sells
implants used in breast augmentation.
Technically speaking, the shares of AGN have been in a stellar
uptrend along the support of their rising 10-week and 20-week
moving averages. Since the stock put in a low of $28.95 in November
2008, the security has skyrocketed more than 140% along the support
of these intermediate-term trendlines.
Despite the stock's stellar technical performance, traders have
bet heavily against the shares. The International Securities
Exchange (ISE) has reported that 28 puts have been purchased to
open for every one call purchased to open during the past 10
trading sessions. This ratio of puts to calls is higher than 99.5%
of all those taken during the past 52 weeks, pointing to a growing
skepticism as traders try to call a top to the stock's rally.
What's more, the Schaeffer's put/call open interest ratio (SOIR)
for AGN comes in at 1.32, as put open interest outnumbers call open
interest among options slated to expire in less than three months.
This ratio of puts to calls is higher than all other readings taken
during the past 52 weeks. In other words, short-term options
players have not been more pessimistically aligned toward the
shares at any other time during the past 12 months.
Overall, an unwinding of this pessimism toward the outperforming
stock could create a wave of fresh buying pressure. Traders should
consider the stock's April 67.50 call to take advantage of a rally
in the shares.
Merck & Co. Inc. (
) is a good example of a bearish opportunity in the drug sector.
The pharmaceutical giant produces top prescription drugs such as
asthma medication Singulair, hypertension fighters Cozaar and
Hyzaar, and cholesterol combatants Vytorin, Zetia, and Zocor. The
company also makes vaccines for diseases like measles, mumps,
hepatitis, and shingles. Its over-the-counter offerings include
Claritin allergy pills and Dr. Scholl's foot care products.
From a technical perspective, the shares of MRK staged a nice
rally along the support of their 10-week and 20-week moving
averages from May 2009 through April 2010 before falling off. The
stock has now dropped below key support at the 34 level and appears
to be headed for another test of longer-term support in the 30-31
Options players have ignored the stock's technical breakdown and
are betting on a rebound in the shares. The ISE has seen 2.6 calls
purchased to open for every one put during the past 10 trading
sessions. This ratio of calls to puts is higher than 76% of all
those taken during the past 52 weeks.
What's more, the SOIR for MRK comes in at 0.83, which is lower
than 89% of all those taken during the past 52 weeks. In other
words, short-term options players have been more optimistically
aligned toward the shares only 11% of the time during the past 12
Analysts on Wall Street also love MRK. According to
, the stock has earned 15 "strong buy" ratings, one "buy," six
"holds," and not a single "sell" rating. Any downgrades from this
amorous group could spell trouble for MRK.
To take advantage of a sell-off in the shares of MRK, traders
should consider the stock's April 34 put.
Finally, some stocks deserve the optimism they have won. A good
example is pharmaceutical guru Pfizer Inc. (
). The company's best-known products include cholesterol-lowering
Lipitor, pain management drugs Celebrex and Lyrica, pneumonia
vaccine Prevnar, high blood pressure therapy Norvasc, and erectile
dysfunction treatment Viagra.
Technically speaking, the shares of PFE are up more than 5%
since the beginning of 2011. The stock has bounced off support at
the 14 level and rallied along the support of its 20-week moving
average, creating a nice "V" formation following its pullback in
the first half of 2010.
The stock's rally atop technical support has won over investors.
The ISE has reported 10 calls purchased to open for every one put
during the past 10 trading sessions. This ratio of calls to puts is
higher than 92% of all the readings taken during the past 52
In addition, the SOIR for PFE comes in at 0.45, as call open
interest more than doubles put open interest among options slated
to expire during the next three months. This ratio is lower than
three-quarters of the readings taken during the past year. In other
words, short-term options speculators have been more optimistically
aligned toward the shares only 25% of the time during the past 52
Analysts are also joining the love fest. According to
, the stock has earned 16 "buy" ratings and five "holds."
PFE may encounter some resistance at the 20.50 region -- an area
that capped the shares in the past. However, a March 18 call would
allow a trader to collect a profit on a continued rally.
The winter 2011 issue of
magazine is now available here.
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