Covidien Plc: Increased Confidence on COV Calls

It is another beautiful Wednesday for contrarian trades and the bullish momentum in the market is stronger than ever even though the S&P 500 gave back some of the gains that was recorded yesterday. There is still a level of fear in the market as investors hold their breath in anticipation of how the outcome of the FOMC meeting today and the Q3 GDP estimates tomorrow will move the markets.

Nonetheless, we will not miss a beat on this bullish momentum as we explore the options of Covidien Plc (NYSE:COV). Covidien with its market capitalization of $40.51B is engaged in the development, manufacture and sale of healthcare products for use in clinical and home settings. The Company operates its businesses through three segments; namely, Medical Devices, Pharmaceuticals and Medical Supplies.

Why Are We Confident in Covidien Today

Shares of Covidien have traded impressively bullishly today despite the 0.37% decline in the S&P 500 and the 0.74% losses recorded in the healthcare sector. As at 2:29PM EDT today, shares of Covidien Plc are trading up 1.58% to $91.42, just a mere 4.23% from its 52-Week high of $95.29.  More interesting is the fact that the stock made that 52-week high earlier this month and bullish momentum remains strong as the stock trades above its 50 and 200-day moving averages.

COV Calls

The chart above (with my annotations) shows how the shares of Covidien have traded within the last one year. You will observe that the stock has gained an impressive 41.25% this year as it jumped from a $70 trading price to a $90 trading price in mid-June.

The awesome 28.57% jump recorded in the middle of this year was directly related to news that Medtronic, Inc. (NYSE:MDT) was interested in buying Covidien in a deal valued at $42.9B. At that price, Medtronic was effectively committing to purchase Covidien at $93.22 per share to mark a 29% premium over its trading price at that time. Covidien current has a market capitalization of $40.51B and the fact that Medtronic was willing to buy the company at a 29% premium suggests that the stock remains undervalued.

From the chart above, you will also observe that shares of Medtronic have an RSI of 55.27, which suggests that the buying action on the stock is just starting out.

Medtronic has earlier left the possibility of changing its mind about the acquisition, if the U.S. tax environment changes when it said that “the transaction is expected to be completed late in the fourth calendar quarter of 2014 or early 2015. However, no assurance can be provided as to when or if the transaction will be completed.”  Nonetheless, Medtronic has maintained a positive outlook on the possibility of closing the deal when it appealed to the European Union’s antitrust regulators to approve its Covidien acquisition deal.

How To Trade COV Options

The reasons presented above makes it very easy to trade options of Covidien easily and thus, I am buying COV calls. I strongly believe that a $96 price target is realistic; hence, I recommend buying the COV Jan 2015 92.500 call (COV150117C00092500) at an asking price of $6.14.

— Daily Option Alerts

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