This week we are featuring an option trading idea based on a stock that just broke out following the Senate healthcare bill. I hope that it is of interest to you.
Merck Breaks Out, can it Continue to Trade Higher?
Merck, broke out to fresh all-time highs last week following news from the proposed senate bill that would allow for less regulation and would not crack down on drug pricing. The Senate appears to be moving toward a vote, which should keep MRK buoyed.
If you concur with the views expressed by these analysts, consider making this trade which is a bet that MRK will continue to advance (or at least not decline very much) over the next six weeks:
After breaking out, prices are consolidating above the recent breakout level. The stock should remain above a downward sloping trend line that shows support near $65. Additional support is seen near the 20-day moving average at $64.33. Momentum has turned positive as the MACD (moving average convergence divergence) index generated a crossover buy signal.
Buy To Open MRK AUG18 62.50 puts (MRK170818P625
Sell To Open MRK AUG18 65.00 puts (MRK170818P650) for a credit of $0.65 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when MRK was trading slightly above $66.20. Unless the stock rallies quickly from here, you should be able to get close to this amount.
If you use our favorite broker for this trade, tastyworks, your commission on this trade will only be $2 per spread (and there is no commission on closing trades, only the $.10 clearing fee). Each contract would then yield $63 and your broker would charge a $250 maintenance fee, making your investment $187 ($250 – $63). If MRK closes at any price above $65 on August 18, 2017, both options would expire worthless, and your return on the spread would be 34% (230% annualized).
As with all investments, you should only make option trades with money that you can truly afford to lose.