Shares of pharmaceutical drug manufacturer
Eli Lilly and Company (LLY) are up 37 percent in the past year. However, the share price has started to sag – and one trader sees the potential for a further decline in the months ahead.
That’s based on the May 2023 $310 puts. With 84 days until expiration, 4,464 contracts traded compared to a prior open interest of 159, for a 28-fold rise in volume on the trade. The buyer of the puts paid $10.25.
Eli Lilly shares recently traded for about $330, so the stock would need to drop about $20, or about 6 percent, for the option to move in-the-money. Shares have a 52-week low of $234, so the strike price is reasonable.
Despite the strong share performance last year, Eli Lilly saw revenues decline 9 percent. That’s helped to push the stock’s valuation up to nearly 50 times earnings, more than twice the valuation of the stock market as a whole.
Action to take: Investors may like shares, provided they wait until after a pullback. The low $210 range would be more reasonable for an entry point. The stock yields about 1.4 percent right now, but at a lower valuation would have a higher starting yield for buyers.
For traders, the May puts are well positioned for a further decline in shares. Traders can likely see mid-double-digit returns on the May $210 puts.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.
