For a while, Gilead Sciences, Inc. (NASDAQ: GILD ) was too shy to take advantage of its technical opportunities and it had many of them. But in late June, GILD stock rallied off a good earnings report. It finally broke out from a hideous lower-high trend that had taken shares down 45% from the June 2015 high.
Source: Gilead Sciences
Recently, Gilead Sciences mounted a 15% rally off a double bottom. The important part of this is the level where the bulls drew the line; $64 per share is a long term pivot area from which the stock broke out in 2013. Support/resistance lines of this significance usually mark turning points. What was resistance in 2013 acted as support now.
I plan on using this to my advantage today.
The technical breakout in GILD stock still has legs, but I don't want to risk my money without room for error. Thus, I won't buy shares and simply hope they fill their potential. Instead I'll use options, where I can set risk with a buffer.
Fundamentally, even after this rally, Gilead stock is still relatively cheap. With a price-to-earnings ratio under 10, it's the cheapest among its peers. Consider that Pfizer Inc. (NYSE: PFE ) and Johnson & Johnson (NYSE: JNJ ) have P/Es almost three times as expensive. In addition, sentiment in GILD shifted from overtly bearish to enthusiastic.
Click to Enlarge Technically, the price action is constructive. The stock is setting higher lows and bouncing off a roof area around the $76.50 mark. If the bulls can prevail, they would overshoot toward $79 - another pivot level that has history.
While I like to see the potential upside, I don't want my profits to depend on this happening. So I'm going to sell downside risk against proven support to create income out of thin air. GILD stock can fall, and I'll still profit - the true definition of cautious optimism!
What's also exciting is that in spite of the optimism, analyst research is still not lopsidedly bullish. Thus, the proverbial bus is not leaning to one side, and the odds of surprise downgrades is low.
I'm also willing and able to own GILD shares if they fall below my support, and that's critical to my strategy. Essentially, I am selling risk against what others fear.
How to Trade GILD Stock
The trade: Sell the Oct $70 put and collect 80 cents per contract to open. This is a bullish trade with an 80% theoretical chance of success. But if Gilead's share price falls below my strike price, I must buy the shares, and then would suffer losses below $69.20.
Selling naked puts require margin. Those who want to mitigate this risk can sell spreads instead. There, the maximum loss is limited by the spread.
The alternate trade: Sell the Oct $70/$67.50 credit put spread, where I have about the same odds of winning but with smaller risk. If successful, this setup delivers 15% in yield.
Investing in the stock market never comes with guarantees. That's why you should never bet more than you 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 on Twitter at @racernic and stocktwits at @racernic .
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