Trading AstraZeneca for less than the Cost of a Little Purple Pill

• Posted by Greg Harmon
• on November 10th, 2014

There are a few stocks in the Pharmaceutical space that I have my eyes on for a longer term trade. One of them presented a good opportunity today, AstraZeneca, $AZN. AstraZeneca has had a storied life this year, involved in merger discussions and then a falling out. But the chart of the stock looks lovely.

The weekly chart above shows that the stock went through a long basing period from 2009 until it broke that in November last year. It spiked up to 80 around the merger talk and fell back when the options was not accepted. Since then it has consolidated in a bull flag and recently found the 50 week SMA for the first time since September 2013. A break of the flag to the upside targets a move to the 95 to 100 area.

During the consolidation the MACD has worked off its peak and is back in the same range where the stock based, but may be ready to cross higher. That is a bullish signal. The RSI has also worked off an overbought condition and is holding in the bullish zone on the pullback. It just needs a trigger over the flag. Or a low cost way to trade it.

I opted for the latter, putting a trade on using options. With the near term resistance from the prior tops at 75 and longer term potential, I bought the November/April 75 Call Calendar for $2.85. This is selling the November 75 Call and buying the April 75 Call. Far less than the cost of buying the stock. I give up the possibility of a dividend in February by using options, but my reward to risk ratio more than compensates for that. And with only $2.85 at risk I avoid needing that little purple pill they make.

The plan following the November Options Expiration would be to sell December Calls to build another Call Calendar and lower my basis. Should the November Calls expire worthless the full premium for selling December Calls will go towards my basis. If those November Calls are in the money I will need to use some of the December Call sale to buy them back.

Get my book, Trading Options: Using Technical Analysis to Design Winning Options Trades.

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