EOT Trade Alert – October 9, 2008

Corey Williams | October 9, 2008

October 9, 2008

Trade Alert:

Buy MRK November 2008 $30 CALLS at $1.50 or better (MRKKF)

Company Background:

Merck & Co (MRK) needs no introduction at all. The company and their products are well known around the world. Founded in 1891, Merck develops and sells pharmaceutical products. They have hundreds, if not thousands of drugs on the market, and are big player in the industry.

Short-Term Catalyst:

Over the last several weeks we’ve seen the entire market get crushed – especially the Dow Jones Industrial Average.

This is causing many investors to oversell their portfolios. What do I mean by that? Simply, the market stops trading on fundamentals and trades purely on FEAR. Investors are dumping stocks left and right. It’s a sell first ask questions later market.

One of those oversold stocks is MRK.

When we’re in oversold situations like this, we often see a short term correction as the stocks move back towards their long term moving averages.

I believe the industry poised to lead the next rally is the the healthcare sector. These companies are a perfect blend of deep value and great growth prospects. They’re also considered a safe haven within the ongoing credit crisis.

Merck’s been taken down a notch just like the rest of the Dow components. They’re trading near a 52-week low. The last time they traded at these levels was early 2006.

I’m looking for a short-term bounce to start in the next few days. To take advantage of this move, we’re looking at short-term – near the money call options on MRK.

On a technical basis, the company is trading well below its 5 day and 20 day moving average. This sets the stock up perfectly for a short term rally.

Trade Details:

Option Ticker Symbol:	MRKKF
Underlying Stock Symbol:	MRK
Current Bid-Ask Price:	$1.10 – $1.25
Option “Buy Up To” Price:	$1.50
Break-Even On Stock At Expiration:	$31.50
Maximum Risk Per Contract:	$150

Exit Strategy:

MRK is trading at $28.02 a share. The strongest support level will be at $27. As the stock moves higher it will reach resistance just over $31 and at $32.50. This is a short-term option, close to the money, so watch the movement closely. A window for profits might come very quickly.

Chart: