Copyright Investor's Business Daily
Eli Lilly (LLY) stock jumped 2.27% on Tuesday and is showing signs of strong accumulation. The stock has risen following its recent, strong quarterly earnings report and a White House deal to reduce the cost of weight-loss drugs. Eli Lilly stock was also added to the IBD SwingTrader on Monday at 967.60. The stock is showing signs of strength and is above its 21-day, 50-day, and 200-day moving averages. Investors interested in taking some bullish exposure can do so with much lower risk through a bull call spread. Implied volatility is reasonably low, which means favoring debit spreads over credit spreads is a good idea. A bull call spread is created through buying a call and then selling a further out-of-the-money call. Bull Call Spread For Eli Lilly Selling the further out-of-the-money call reduces the cost of the trade but also limits the upside. A June 18, 1,140-strike call option is trading around 72.20 this morning, and the June 18, 1,160 call is around 66.35. Buying the 1,140 call and selling the 1,160 call creates a bull call spread. The trade cost this morning was $585 – the difference in the option prices multiplied by 100. The maximum potential profit would be $1,415 – a difference in strike prices, multiplied by 100 less the premium paid. A bull call spread is a risk defined strategy, so if Eli Lilly stock closes below 1,140 on June 18, the most the trade could lose is the roughly $585 premium paid. Potential gains are also capped above 1,160, so no matter how high Eli Lilly stock might go, the most the trade could profit is $1,415. The breakeven price for the trade is equal to the long call strike plus the premium, which in this case would equal $1,145.85. In terms of trade management, if the stock dropped below 925, or if the spread value dropped to $2.90 from $5.85, I would consider closing early for a loss. The 925 level is around the closing price from Nov. 7, which would invalidate the bullish thesis. Cutting losses at 50% of the premium paid helps preserve capital for future opportunities while preventing small losses from becoming large ones. Eli Lilly's IBD Ratings Investor's Business Daily gives Eli Lilly stock a Composite Rating of 99 out of a best-possible 99, an Earnings Per Share Rating of 98 and a Relative Strength Rating of 88. According to IBD Stock Checkup, Eli Lilly ranks first in its group. Eli Lilly is a global pharmaceutical company that develops innovative medicines for conditions such as diabetes, cancer, immunology, and neurological disorders. Its blockbuster drugs Mounjaro and Zepbound address obesity. Founded in 1876, the company is known for its strong research pipeline, consistent profitability, and leadership in the health care sector. Recently, Eli Lilly reported an impressive 495% increase in adjusted earnings to $7.02 per share, driven by strong demand for its incretin (diabetes and weight loss hormone) portfolio. The company also raised its full-year guidance above analyst expectations. Please remember that options are risky, and investors can lose 100% of their investment. This article is for education purposes only and not a trade recommendation. Remember to always do your due diligence and consult your financial adviser before making any investment decisions. Gavin McMaster has a masters in applied finance and investment. He specializes in income trading using options, and is conservative in his style. He also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ. YOU MIGHT ALSO LIKE: How To Create A 'Dividend' With This SoFi Stock Option Trade As Merck Stock Gets Back To Its Feet, Here's One Possible Option Trade Here's A Potential Robinhood Stock Trade With Earnings On The Way With Boeing Stock Below Its 50-Day Line, Consider This Option Trade
