Posted on December 23, 2021
Today’s trade is based on the pharmacy giant criminals at CVS (NYSE:CVS) and their Woonsocket, Rhode Island cast of rogues.
First, because the pharmacists are taking a beating.
And second, because we don’t like rogues.
As for the sector, consider the following –
Of course, market reaction to these announcements is positive at first, because, you know, “all the savings” and “accretive to earnings” and the like.
But that’s just at first.
Then the stock tops out.
Yes, sound they are, relatively –
So what gives?
Anyway, CVS has profited nicely over the last year from Batflu testing and vaccinations, but now that “Covid Optimism” has struck, we’ll likely see a curtailing of that revenue source. Overall retail pressures and tough competition in the sector will also make it difficult for the stock to keep its recent gains.
In short, we say the jig is up.
And we don’t believe its ownership of insurer Aetna will help matters significantly.
Until rates start rising quickly, insurers are also stuck.
Now take a look at the chart –
Technically, we see a firm top in place, and significant declines over the near term.
And it’s for all the foregoing that we now recommend the following –
A Jew and His Gold recommends you consider the sale of the CVS May 20th 100/105 CALL spread* for a credit of $1.95 (6.35/4.40) and purchase of the CVS May 20th 97.50/87.50 PUT spread** for $3.22 (5.30/2.08). Total debit on the affair is $1.27.
Rationale: we like the $1.27 outlay to gain a max profit of $8.73 (687%).
We also like the time horizon on offer of five months.
Max loss is $6.27 (difference between the CALL strikes plus the initial credit).
Very tight spreads on the options give us a great entry.
We’ll likely close on first sign of a decline to our target area of 87/88.
The Book of Redemption opens this Shabbat. May we all be on board!
Many happy returns,