With Amgen Shares Trending Lower, 3 Trades To Take Advantage Of The Dip

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Source: Investing.com

Amgen shares have a 12-month median price target of $245.30, implying an increase of about 16% from current levels. The 12-month price range currently stands between $185 and $298.

Trailing P/E, P/S and P/B they stand at 14.98x, 4.02x and 3.69x for PFE stock.

Readers who watch technical charts might be interested to know that a number of AMGN’s intermediate-term indicators are still cautioning investors. However, leading short-term indicators show that the recent decline could be coming to an end soon.

As part of the short-term sentiment analysis, it would be important to look at the implied volatility level (IV) for Amgen stock options, which typically shows traders the market's opinion of potential moves in a security. However it does not forecast the direction of the move.

AMGN’s current implied volatility is 22.1, which is lower than the 20-day moving average of 23.2. In other words, IV is trending lower, which might mean that options markets are not expecting large moves in the coming days.

Our first expectation is for Amgen stock to trade sideways between $205 and $215 and establish a new base. Then, a new leg could start.

1. Buy AMGN Stock At Current Levels

Investors who are not concerned with daily moves in price and who believe in the long-term potential of the company could consider investing in Amgen stock now.

On Nov. 12, AMGN stock closed at $211.39. Buy-and-hold investors should expect to keep this long position for several months while the stock makes an attempt toward $245.30, a level which matches analysts’ estimates. Such an up move would mean a return of close to 16% from the current level.

Readers who plan to invest soon but are concerned about large declines might also consider placing a stop-loss at about 3-5% below their entry point.

2. Buy An ETF With AMGN As A Main Holding

Many readers are familiar with the fact that we regularly cover exchange-traded funds (ETFs) that might be suitable for buy-and-hold investors. Thus, readers who do not want to commit capital to Amgen stock but would still like to have substantial exposure to the shares could consider researching a fund that holds the company as a top holding.

Examples of such ETFs include:

• VanEck Biotech ETF (NASDAQ:BBH): This fund is up almost 12% YTD, and AMGN stock’s weighting is 8.77%
• Invesco Dynamic Pharmaceuticals ETF (NYSE:PJP): The fund is up 13.8% YTD, and AMGN stock’s weighting is 5.67%
• SPDR Dow Jones Industrial Average ETF Trust (NYSE:DIA): The fund is up 18.1% YTD, and AMGN stock’s weighting is 3.88%
• Invesco QQQ Trust (NASDAQ:QQQ): The fund is up 25.8% YTD, and AMGN stock’s weighting is 0.86%

3. Diagonal Debit Spread On AMGN Stock

Our third trade is a diagonal debit spread on Amgen using LEAPS options, where both the profit potential and risk are limited. We have provided numerous examples (for example, here and here) of this type of options strategy that is also known as a "poor person's covered call" on a given stock.

A trader first buys a “longer-term” call with a lower strike price. At the same time, the trader sells a “shorter-term” call with a higher strike price, creating a long diagonal spread.

The call options for the underlying stock have different strikes and different expiration dates. The trader goes long one option and shorts the other to make a diagonal spread.

Most traders entering such a strategy would be mildly bullish on the underlying security. Instead of buying 100 shares of Amgen, the trader would buy a deep-in-the-money LEAPS call option, where that LEAPS call acts as a “surrogate” for owning the stock.

On Nov. 12, AMGN stock was at $211.39. For the first leg of this strategy, the trader might buy a deep in-the-money (ITM) LEAPS call, like the AMGN 19 January 2024, 160-strike call option. This option is currently offered at $54.35. It would cost the trader $5,435 to own this call option that expires in about two years and two months instead of $21,139 to buy the 100 shares outright.

The delta of this option is close to 80. Delta shows the amount an option’s price is expected to move based on a $1 change in the underlying security.

If AMGN stock goes up $1 to $212.39, the current option price of $54.35 would be expected to increase by approximately 80 cents, based on a delta of 80. However, the actual change might be slightly more or less depending on several other factors that are beyond the scope of this article.

For the second leg of this strategy, the trader sells a slightly out-of-the-money (OTM) short-term call, like the AMGN 21 January 2022 215-strike call option. This option’s current premium is $5.95. The option seller would receive $595, excluding trading commissions.

There are two expiration dates in the strategy, making it quite difficult to give an exact formula for a break-even point in this trade. Different brokers might offer “profit-and-loss calculators” for such a trade setup.

The maximum potential is realized if the stock price is equal to the strike price of the short call on its expiration date. So the trader wants the AMGN stock price to remain as close to the strike price of the short option (i.e., $595 here) as possible at expiration (on Jan. 21, 2022), without going above it.

Here, the maximum return, in theory, would be about $857 at a price of $215 at expiry, excluding trading commissions and costs. (We arrived at this value using an options profit-and-loss calculator).

By not investing $21,139 initially in 100 shares of Amgen, the trader’s potential return is leveraged.

Ideally, the trader hopes the short call will expire out-of-the money (worthless). Then, the trader can sell one call after the other, until the long LEAPS call expires in over two years.