Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) much like the entire stock market had a difficult two weeks. This morning it seems that investors are coming to terms with the worries emanating from the prospects of higher rates. While the spike in the 10-year yield was scary, it wasn’t a surprise and we all knew that it was coming. Besides, 3.20% versus 3% is not a going to cause TEVA stock to collapse or cause Apple Inc. (NASDAQ:AAPL) to sell fewer iPhones.
So dips are opportunities in this still bullish market. TEVA has an added potential that is purely technical. The stock is showing a potential breakout that would send it 25% higher from here, and therein lies my opportunity.
Fundamentally, TEVA stock is not cheap. There is no tangible value to measure from a price-to-earnings perspective, so my trade today is mostly a bet on price action. The iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) also shares a similar breakout stance, but I still have to worry about a Trump tweet about drug stocks.
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Nevertheless the opportunity is real.
How to Trade TEVA Stock
Technically speaking, this is where it gets interesting. TEVA stock is still close to an all-time pivot point, which is likely to hold in the long run. But more importantly, the weekly and monthly charts clearly show that there is a descending trend line of lower highs. Those usually offer bulls an opportunity to break out.
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If TEVA stock exceeds the trend line on a closing basis, the bears yield and the bulls prevail. The result is an overshoot higher. In this case, the potential breakout price is a moving target. Normally, I like to wait for a confirmation for the triggering close level. But since we have just had a correction and since there isn’t much further downside, I am willing to jump the gun a little and enter long now.
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Wall Street experts are in a holding pattern and TEVA stock is trading in the middle of their price range. That means added help from the experts, which is good news because if I am correct about the breakout, they could add fuel after the breakout starts. However, they will need to raise their position and/or targets.
The bullish call bet: Buy the TEVA Jun $20/$22.50 debit call spread for 80 cents. This is my maximum potential loss. But if the price rises above my spread, then I stand essentially to triple my money.
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I can reduce my out of pocket expense. I do this by selling risk below current levels. The worst case scenario here would be to go long TEVA stock at lower levels without much out of pocket damage.
The bullish put bet – The bank (optional): Sell the TEVA Jun $15 put and collect 70-cents-per-contract and completely eliminate my call spread costs.
As long as the price stays above my sold puts, then any premium I recover from selling my call spread would be pure profit.
Ultimately, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Get my newsletter for free 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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