Why It Might Be Time to Buy Merck, Eli Lilly Call Options

Earnings reports are expected from Merck and Eli Lilly next week

Apr 27, 2017 at 2:19 PM
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Healthcare and drug stocks have been among the best performers in May, historically speaking. This seasonal trend bodes well for pharmaceutical giants Merck & Co., Inc. (NYSE:MRK) and Eli Lilly and Co (NYSE:LLY). On top of that, Schaeffer's Senior Quantitative Analyst Rocky White recently ran a study on stocks with a chance to bounce off nearby trendlines, and both MRK and LLY shares were represented.

Merck Stock Set to Surge

Ahead of next Tuesday morning's earnings report, MRK has been flirting with its 200-day moving average. According to White's data from the last three years, the Dow stock has touched this trendline on three prior occasions, posting positive returns 100% of the time on both five- and 21-day time frames. Specifically, the shares average a gain of 1.7% a week after the signal and an even more impressive 4.6% one month out.

merck stock chart today

Technically speaking, a bounce off the trendline would help MRK stock resume its longer-term uptrend. At $62.70, the shares have gained 12.5% year-over-year, but have cooled off since touching a 15-year peak of $66.80 on March 1.

If the 200-day moving average fails to serve as a foothold, shares of Merck & Co., Inc. could find an additional layer of support at the $61 level. Specifically, peak put open interest resides at the May 61 put, totaling roughly 26,300 contracts. As the hedges related to these bearish bets unwind ahead of front-month expiration, MRK stock could get a boost.

Eli Lilly Options Cheap Ahead of Earnings

LLY will also report earnings next week, the morning of Monday, May 1. Ahead of the event, the shares have been consolidating atop their 80-day moving average -- which could be a bullish signal, if history is any indicator. Specifically, after 10 previous occurrences, LLY stock has managed positive returns almost 80% of the time in the ensuing 21 sessions, with an average gain of 2.5%. This would be more of the same for the shares, which have been heating up since bottoming near $64 in late November.

From a contrarian perspective, there's little fuel for the fire, as Wall Street is overwhelmingly bullish toward the stock. Over 70% of tracking analysts rate Eli Lilly and Co a "buy" or better, and just 1.2% of its float is sold short. Regardless, options traders can purchase surprisingly affordable premium on short-term strikes at the moment. LLY stock's Schaeffer's Volatility Index (SVI) of 17% sits below 92% of all other readings from the last 12 months.

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