When confronted with a potentially great trade, always step back and ask yourself these questions…
What is the backstory? Why is this such a great possibility?
During earnings season, traders often move stocks up and down—too much, too soon—and ignore fundamentals. When they’re done, if it’s a great company and stock investors move in, bounce downs turn around.
We recently saw several stocks bounce down, but are poised to move up. My favorite is Gilead Sciences (GILD).
Gilead sold off due to a decline in revenue, led by a decline in sales of the hepatitis C treatment Harvoni—despite beating profits from the same period from last year.
There’s more: gross margins continue to be in the 88% to 90% range. The company is a cash machine and trades well below the average valuation of the S&P 500.
The stock is dirt cheap and sold off on this news, holding up around $87.50 and then moving up from that level. If you sell the slightly-in-the-money May Week One 88.00 put right now, you could collect around $1.30.
If the put expires worthless, you have an absolute return of more than 1.4%. That’s an annualized return (if you made this trade 52 times a year) of more than 72%, all from one of the most profitable and solid companies in the world.
Sure beats waiting for a dividend or buying a DC, eh?