EOT Trade Alert – February 24, 2009

Corey Williams | February 24, 2009

February 24, 2009

Trade Alert:

Buy WPI May 2009 $30 CALLS at $2.30 or better (WPIEF)

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 the markets there’s a saying, stick with what works. Once you find a trend that seems to have legs, it’s important to jump on and follow it for all it’s worth. We’ve found that trend in Watson Pharmaceuticals (WPI).

Back in December we purchased call options on the stock… then watched as the stock moved steadily higher. Peak profits were over 200% on the trade!

Now, Watson is continuing to move for a variety of reasons.

First is the industry movement. A number of large acquisitions have been announced, and this makes the entire industry more valuable. Anyone and everyone with a decent business could be a target of a buyout, and that means big money to shareholders.

Do I think Watson’s a target? Maybe, maybe not.

Here’s the thing… it doesn’t matter. Just the hint that acquisitions are accelerating in the health care industry and everyone’s stock rises on speculation.

Then there’s the performance reason.

Remember, Watson makes generic drugs… not a very exciting industry. However, in today’s economic environment everyone is looking to cut back on costs. So why not trade in the name brand prescription for a generic one? It makes sense and I’m sure it’s helping company performance.

Also, as I said in the trade report back in December…

“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.”

That’s why we are reestablishing a position in Watson Pharmaceuticals (WPI).

On a technical basis, the 50-day moving average is now in a solid uptrend, and we had a moving average crossover to the upside in late January. I’m expecting these trends to continue for a while more.

Trade Details:

Option Ticker Symbol:	WPIEF
Underlying Stock Symbol:	WPI
Current Bid-Ask Price:	$2.00 – $2.10
Option “Buy Up To” Price:	$2.30
Break-Even On Stock At Expiration:	$32.30
Maximum Risk Per Contract:	$230

Exit Strategy:

WPI is trading at $29.71 per share. Resistance levels will be at $31.50 and again at $33. Remember we want this stock to move higher. Support levels will be at $27 and $25. Conservative investors should look to exit at the first support or resistance level. Aggressive investors may want to hold for a bigger move.

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