Novartis is Rising, Ranging, and Crashing

I am revisiting the options of pharmaceutical companies today as explore the possibilities for profit in put options. Novartis AG (NYSE:NVS) has my attention today as I try to explore the bearish side of the earnings season. Novartis with its market capitalization of $280.29B provides healthcare solutions.

The Company is a multinational group of companies specializing in the research, development, manufacturing and marketing of a range of healthcare products led by pharmaceuticals. Its portfolio includes medicines, eye care, cost-saving generic pharmaceuticals, preventive vaccines, diagnostic tools, and over-the-counter products.

I wrote about trading the options of Novartis in January in a post in which I gave you two reasons to buy NVS call options. In that post, I talked about Novartis’ vibrant product pipeline and its impressive stock performance. I then gave the stock a $100 price target by April. When I wrote that piece, the shares of Novartis were trading at $98.20 per share and the share soared to a $103 trading range to set a new 52-week high at $104.66 at the expiration of the contract.

New Novartis Coverage

The shares of Novartis declined 0.60% to close at $103.45 yesterday and the company is set to release first quarter (Q1 2015) this morning. The chart below shows how the shares of Novartis have traded within the last one year and it provides interesting insight on how to trade NVS options.

NVS Chart

From the chart, you will observe that the shares of Novartis has managed to rise from an $82 trading price to a $104 trading price over the course of the last one year (red arrow). However, while the shares of Novartis have managed to climb north you will notice the weird ease with which the stock is peaking and crashing (blue parabola lines).  Hence, every rally in the shares of Novartis over the last one year is usually followed by an extended channeling that eventually leads to an extended pullback to previous lows.

The shares of Novartis have been recording another uptrend in April but it seems that the party is over as the stock recorded two days of losses in the last three sessions.  I posit that the shares of Novartis might range for a while but that a pullback is inevitable, given the previous performance of the stock.

Earnings Might Precipitate the Pullback

As I have mentioned earlier, Novartis is set to release its first quarter results today. However, the company has not had a sterling reputation of earnings outperformance in the previous quarters; hence, an earnings miss is likely to send the stock crashing today.

The first factor that supports the possibility of an earnings miss is that Novartis has missed earnings estimates twice in the last four quarters and it has an average earnings beat of a measly 1.2%. In addition, the consensus analyst EPS estimate of $1.09 underperforms the EPS of $1.31 per share from the comparable period in 2014.

Fundamentally, Novartis’ top and bottom lines are likely to be impacted by how the major drugs in its portfolio fares. The key drugs include Gleevec, Exelon, Sandostin, Tasigna, Afinitor, Gilenya, Lucentis, Galvus, Jakavi and Xolair. For instance, drugs such as Diovan have lost patent protection and generics will surely reduce its sales in 2015. Gleevec will also lose its patent in the U.S. this year and the patent will be lost in the EU in 2016.

How to Trade NVS Options

From the foregoing, the chances of an earnings beat from Novartis are slim and an EPS underperformance will most likely send the stock crashing. The worst part is that the stock has a Zacks Number 4 Rank “Sell” and it has a Zacks Style Score of “F” on Momentum.

Hence, the sell action is likely to be massive if Novartis underperforms. The bearish side holds more appeal to me on Novartis and I recommend buying the NVS Jul 2015 100.000 put (NVS150717P00100000) at asking price of $1.90.

— Daily Option Alerts

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