Long call trade on TEVA (Leap calls)

Lately I’ve been trading leap options and long-term options as I see that those options often mis-priced due to the large volatility of stocks over the long-term.

I wanted to share an interesting idea I see with TEVA – the biggest generic drug manufacturer. In the last 18 months Teva is in a clear down trend, going from $65 to about $31 today (losing more than 50%).
The reasons for this decline are well documented and deserved. TEVA was growing stronger on the promises of the synergies from recent M&A deals it made (the largest so far). When the market saw that not only the synergies are not as expected, but also had troubles with the merger the market sent the stock to a free fall.
 But that was in the past. After the CEO was replaced and at current level, most of the bad news are already priced and the positive plans Teva is planning for 2017 can start to unfold.
The main reasons to be optimistic about Teva:
  1. The stock is Cheap – Analysts expect $4.81 EPS for 2017. At current price level the PE is 6.44 where other drug manufacturers are at 20-30 PE
  2. Analysts target price is $40, about 30% increase from today.
  3. Wall St. sees value in the company. Last conference call analysts started to inquire about spin-offs in Teva – which means they see hidden value in the company.
  4. Teva has a strong pipeline of products for 2017 – the results of the recent acquisitions.

I believe that fundamentally Teva will go up in 2017. However it is still in a down trend so it’s like catching a falling knife. To protect myself I’m looking at a limited risk – unlimited reward trade. In this case very simple: Buying a call.

We can buy Call Strike 32.5 for Jan 2019 at less than $2.35 per option. This means:
  • Max risk 235$ (7.5% compared to the stock – like having a stop-loss of 7.5%)
  • Reward if stock goes to $40 by expiration (9 months) is $750 or  319% profit on risk.
  • Interactive card: https://optionsamurai.com/trade/13169
Teva Long call  trade
Teva Long call trade

 

Summary
 Teva is in a down-trend and could continue downwards in the short-term. However if you believe that fundamentally the stock is strong, then at the current price the stock is very attractive. A long call trade provides us with maximum loss of 7.5% and max profit of more than 300% compared to the risk.
(Disclaimer: The author plans to initiate a trade on Teva)

 

 

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