TEVA stock has struggled since the company acquired the generic medicine business of Allergan (NYSE: AGN). The purchase of that business required TEVA to take on debt, hampered TEVA’s cash flow, and forced the company to slash its dividend.1
This Thursday before the open, TEVA is set to announce their third-quarter earnings. This has some traders wondering if TEVA stock is potentially due for a rebound.2 Monday morning, a trader took a rather large position looking for TEVA stock to do just that:
- The trader bought 18,000 TEVA January 15 calls for $0.87.
- And concurrently sold 18,000 TEVA January 17.5 calls for $0.30.
- Taken together, the net position is long 18,000 Jan 15-17.5 call spreads for $0.57 ($0.87 - $0.30).
By owning the call spread, they profit if TEVA stock rises before January 19, 2018. The Snapshot Analysis using the OptionsHouse platform looks like this:
The trader who bought these call spreads has defined risk, meaning they can only lose the $0.57 that they paid for each spread. However, since options employ leverage, and since the trader bought 18,000 spreads, the amount of money the trader spent for this position is no small amount, namely, $1,026,000.00 (18,000 x $0.57 x 100). If TEVA remains below the breakeven price of $15.57 before January expiration, the trader stands to lose the entire amount they paid for these spreads.
The maximum profit they can potentially make is $1.93 per spread, which is the difference between the strike prices less what they paid for the spread ($17.5 – $15 - $0.57 = $1.93). So the upside potential of this spread is also defined. To break even, the traders need TEVA to rise the amount they paid for the spread above the $15 strike, which is $15.57 ($15 + $0.57). If TEVA stock rises above $15.57, the trader will begin to profit from this trade. The trader would see maximum profit if TEVA rises above $17.50, after which the profits are capped. At that point the trader would stand to make $3,474,000.00 (18,000 x $1.93 x 100).
Bottom line though, is that at least one trader is making a big bet that TEVA has been beaten on for too long, and is poised for the tide to turn.
1. Seeking Alpha: Another Dividend Cut For Teva? 10/25/2017.
2. Nasdaq: Is a Turnaround in Store for Teva (TEVA) in Q3 Earnings? 10/30/2017.