Jazzed About the Options to Buy Jazz

11/10/2014 8:00 am EST


Gregory Harmon, CMT

Founder and President, Dragonfly Capital Management

Greg Harmon, of Dragonfly Capital, thinks this pharmaceutical company may be ready to have a massive run higher and while he admits that it would be expensive to try to add lots to a portfolio, he suggests to participate in the upside thorough the options market instead.

The pharmaceutical space has been red-hot. It does not seem to matter what part of that space, when a stock is ready to move, it moves big. The next big move may be in Jazz Pharmaceuticals, (JAZZ). This stock had a massive run higher though out 2013 but has been consolidating since then.

Click to Enlarge

The weekly chart above shows that consolidation in an ascending triangle. It reported earnings Wednesday and is now inching back higher. A move and hold over 176 carries a target higher to 229.

At that price, it is expensive to add ten round lots to your portfolio for this ride, but there is no need to. Jazz does not pay a dividend so why not just participate in the upside thorough the options market.

Jazz has options available in June 2015, and then January 2016, and based on the time for the previous move higher, the January chain is preferable. Buying the January 2016 175 Call for $27 to participate may seem expensive. But this cost can be traded away over time. One way is to start with a call calendar, by selling the November 175 Calls to get back $3.50. As these expire, look to sell a December strike. Or if they are in-the-money, buy them back and sell a December strike that nets you a credit. Lather, rinse, and repeat until January 2016.

By Greg Harmon of Dragonfly Capital

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