Eli Lilly's (LLY), with its performance of Mounjaro, an anti-obesity drug, was the talk of the market last week.
Pharma stocks that are focused on anti-obesity medications have attracted attention over the past few weeks, as they continue to move up. IBD reported that Mounjaro's first-quarter sales exceeded expectations. Lilly wants to use Mounjaro as an obesity treatment.
Stock is also in the zone to buy of a cup with handle formation.
According to IBD Stock Checkup, Lilly's stock ranks second in the Medical Diversified industry group with a Composite Ratio (CR) of 89.
With these new antiobesity drugs gaining momentum, it is likely that any Lilly shares which are falling in value will be purchased. LLY is also a leader in IBD Leaderboard.
Lilly Trade Neutral to Bullish
This is a call long with a duration that expires in September. This gives the chart an opportunity to fade and stay within a range.
This is a neutral or bullish trade that anticipates a price hold above 390 during the summer.
Call 410 to buy 1 Lilly monthly Sept. 15th.
Total debit is 0.38 per Butterfly. Since this is a credit, it becomes our total risk of holding the position.
The cost of the butterfly is equal to the difference between the strike prices of the long-call spread (i.e., $390-$400=$10) and the cost of the butterfly ($0.38). Total is $9.62.
This is a neutral or bullish trade that anticipates a stock price above 390 during the summer.
Understanding the Call Butterfly
This is a neutral or bullish strategy using four option contracts with the exact same expiration date but three different strike price:
- With lower strike price
The middle is fat (representing twice as many strikes), and there are "wings" either side.
Butterflies can be very powerful trading tools, as they produce high returns when managed properly. The best results are achieved in low-volatility areas with an extended period of grinding within a range, or high-volatility zones where a sharp spike that does not go through the middle will produce the best results.
The market is currently in a unique situation with low VIX readings, but the volatility below it has begun to increase. This can cause price fluctuations, so paying a large amount of premiums will increase the risk.
There is always a cost to a cheap trade. The total profit will be reduced if you hold the trade until expiration while the price is rising.
This trade offers a very good opportunity to earn a high return and is inexpensive.
The key levels of the chart are identified.
The breakout level is at 390. This chart may fade as it approaches new highs. We want to give the chart time to settle down and not have it affect our investment too much.
Scenarios For LLY Options Trade
What could happen?
If the stock is close to 400, but not above it at expiration, it will move into the middle strike. Then we get the full $9.68 profit less commissions.
We lose the full amount of 0.38 and commissions if the stock moves up to the strike price we bought.
The stock moves up to 395. The ideal profit line will be reached as we approach the end of summer, when the position is likely to be worth between $1.7 and 2.55. We exit the trade at the profit line.
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If you are bearish on the market and anti-obesity drugs in general, then the put butterfly using the strikes 330,320,310 will result in a 0.10 credit.
I don't often stop my butterflies. I sell another short-call spread at my strike price if the chart does not move or starts to behave badly. This will create a positive outcome for the trade.
This is why butterflies are a great learning experience, even though they're more of a trade event.
Consider your risk and what you enjoy about the trade.