Why the risk/reward didn't align for a put trade on AGN
Our traders are stalking a lot of different stocks throughout the week, but not every potential trade idea develops into a formal recommendation to our subscribers. Whether it's the break of a key technical level for the shares, an unexpected news announcement, or an unfavorable options pricing environment, this regular feature will shed some light on the factors we view as "deal breakers" to otherwise intriguing trade setups. Today, Schaeffer's Senior Equity Analyst Joe Bell, CMT, chimed in on one stock he was recently considering -- but ultimately rejected -- for a bearish options recommendation: pharmaceutical stock
Allergan plc Ordinary Shares (NYSE:AGN).
What He Liked About an AGN Put Trade
Specifically, AGN shares caught Bell's eye because:
- The stock rallied to round-number $250 area, which was the site of April's bearish earnings gap, along with resistance in June and August 2016.
- AGN was sporting a 14-day Relative Strength Index (RSI) above 70 -- suggesting it was overbought.
- Its MACD turned negative on Feb. 23.
-
Peak call open interest at the March 250 strike could be resistance.
- None of the 16 analysts following the stock recommend selling it. In fact, 75% recommend buying it, and 25% have a "hold" rating. A lot of downgrade potential.
Why He Backed Out of a Bearish Bet
However, there were four reasons Bell ultimately chose not to recommend AGN put options:
- AGN's 200-day moving average was starting to turn higher.
- The stock's 40-day moving average crossed above its 200-day moving average -- dubbed a "golden cross."
- Stock appears to be forming a flag formation, which is traditionally a continuation pattern that resolves itself in the direction of the underlying trend.
- The pharmaceutical industry has been extremely strong in 2017, showing great momentum, with no clear resistance levels immediately overhead. Betting against AGN while its industry is so strong makes it a risky bet at this point.
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