Eli Lilly last week broke out above a 284 buy point from a cup-without-handle base and is holding above that key level.
The drug manufacturing company develops, manufactures and sells pharmaceutical products and animal health products. On Thursday, the FDA rejected a lung cancer drug Lilly was testing, but the stock still rose.
According to the IBD Stock Checkup, Lilly stock ranks No. 2 in its industry group and has a Composite Rating of 92, an EPS Rating of 88 and a Relative Strength Rating of 93.
The stock is currently trading above its 50- and 200-day moving averages, and those moving averages are sloping upward. That's generally a bullish sign.
Lilly Bull Put Spread Idea
With the stock holding up well, investors could look to sell a 270-265 bull put spread for the April 14 expiration. That spread was trading around $0.80 a share Wednesday.
I would look to put in an order to sell the spread for $1 and see if Lilly stock comes down a bit in order for the spread to get filled.
This would offer a potential 25% return in three weeks, provided Lilly stock is above 270 at expiration.
The maximum profit on the trade would be $100 per contract with a maximum risk of $400.
The maximum loss would occur if Lilly closes below 265 on April 14, which would see the premium seller lose $400 on the trade.
The break-even point for the bull put spread is $269, which is calculated as $270 less the $1 option premium per contract. If the spread doesn't get filled, I would just move on to the next opportunity.
Lilly Stock Cash Secured Put
Another idea would be to sell the 270 put as a cash-secured put. This would generate around $2.50 in premium, with a break-even price of $267.50.
This strategy requires a lot more capital because the maximum loss would be $26,750 and would occur if Lilly shares went to zero.
Similar to the bull put spread idea, if I wanted a bit more margin for error in the trade, I might set up the order around $3.50 instead of $2.50 and wait to see if it gets filled. A stop loss could be set at around 265.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
