EOT Trade Alert – December 16, 2008

| December 16, 2008

December 16, 2008

Trade Alert:

    Buy WPI February 2009 $25 CALLS at $1.75 or better (WPIBE)

Company Background:

Watson Pharmaceuticals (WPI) develops and makes branded and generic pharmaceuticals.  The products are used in many different therapeutic areas, including central nervous system, nephrology, hormones and synthetic substitutes, and cardiovascular, among others.

Short-Term Catalyst:

In early October we put on a trade in the stock of another pharmaceutical company.  It was good for a quick move up and a 116% gain.

Now I’m looking for something similar.

We’ve had two days of a lull in market volatility (in other words 2 back to back days without triple digit moves).  I hope this is the start of a return to intelligent investing.

In other words, people using their head instead of following their emotions.

So what’s happening?  I think we’re setting up for a New Year’s rally.  Why?  This year’s been horrible.  Investors are searching for good news.  People want a reason to buy the market.

They’re going to find one with the new president.  Obama and his administration are going to start the year off with a bang.

We’re going to see massive amounts of economic stimulus being pushed through Congress.  I’m expecting the first 100 days of the new president’s administration to be full of market moving events and news.

One area sure to receive presidential focus is the healthcare industry.

Specifically the cost of drugs.  Now, I’m not expecting massive legislation.  What I am expecting is some attention to be focused on the issue.  Watson is a low cost generic provider… and without a doubt the low cost providers will be held up in a good light.

Watson also has the added benefit of being a small capitalization company.  Smaller capitalization companies have traditionally outperformed their bigger cap brothers when the market is exiting a recession.

I’m expecting a lot of good news out of the company in the early portion of the New Year.  Watch this closely as any new news event could cause the stock to pop.

On a technical basis, the company’s stock is trading just above its 50-day moving average.  We’ve been crossing over and under the line for a few days now.  About 2 weeks ago we had a 5- and 20-day moving crossover occur to the upside.  This data points to a higher price in the coming weeks.

Trade Details:

Option Ticker Symbol: WPIBE
Underlying Stock Symbol: WPI
Current Bid-Ask Price: $1.40 – $1.50
Option “Buy Up To” Price: $1.75
Break-Even On Stock At Expiration: $26.75
Maximum Risk Per Contract: $175

Exit Strategy:

WPI is trading at $24.30 a share.  Resistance levels will be at $25.50 and again at $27. Support levels will be at $22 and again at $21.  Conservative investors should look to exit at the first resistance or support level reached.  Aggressive investors may want to hold out for a bigger move.



Category: EOT Trade Alert

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