Pharma Stock Buy Signal Has Never Been Wrong

It could be time to scoop up call options on ZTS

May 21, 2018 at 1:37 PM
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Animal drug maker Zoetis Inc (NYSE:ZTS) made headlines last week, after announcing plans to buy Abaxis (ABXS) for about $1.9 billion. ZTS shares have moved higher since the announcement, and are back within striking distance of new record highs. Nevertheless, near-term options on the biotech can still be scooped up at a bargain -- sending up a buy signal that has yet to be wrong for Zoetis stock.

At last check, ZTS was up 0.9% to trade at $85.17 -- not far from its April 18 all-time high of $86.38. Earlier this month, the shares gapped lower after earnings, but found support at their 100-day moving average. Pullbacks to this trendline have marked buying opportunities for Zoetis stock over the past year, during which the shares have rallied more than 41%.

ZTS stock chart

In the wake of the security's post-earnings volatility crush, its Schaeffer's Volatility Index (SVI) of 16% stands in just the 11th percentile of its annual range. In simpler terms, the stock's short-term options are attractively priced, from an implied volatility standpoint.

Since 2008, there have been five times in which ZTS shares were trading close to an annual high while simultaneously sporting an SVI in the bottom 20% of its annual range. After each of those prior signals, the pharma stock was higher one month later across the board, averaging a healthy gain of 4.9%, per data from Schaeffer's Senior Quantitative Analyst Rocky White. A similar rally from current levels would put Zoetis stock around $89.34 -- well into uncharted territory.

Speculators expecting another short-term pop for ZTS could consider the June 85.50 call, which is currently asked at $1.50. Buyers of the call would profit the higher Zoetis stock surges north of $87 (strike plus premium paid) by the close on Friday, June 15, when the newly front-month options expire.


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