Watson Pharmaceuticals (NYSE:WPI) is engaged in the development, manufacture, marketing, sale and distribution of branded and off-patent (generic) pharmaceutical products. The company markets a range of branded and generic pharmaceutical products which it sells primarily to drug wholesalers, retailers and distributors, including chain drug stores, hospitals, clinics, government agencies and managed healthcare providers, such as health maintenance organizations and other institutions. Watson also develops advanced drug delivery systems designed to enhance the therapeutic benefits of existing drug forms.
After an extensive search for "bullish" issues with viable spread positions, we finally found a stock that is not extremely overbought and has a reasonable probability of continued upside activity in the near-term. The catalyst for last week's renewed interest in WPI was the announcement by Novartis AG that it will acquire Eon Labs (NASDAQ:ELAB). Credit Suisse First Boston added fuel to the fire, saying it expects merger activity to intensify in the specialty pharmaceuticals sector and that WPI was an "attractive" consolidation target with "favorable valuation attributes."
Regardless of the eventual outcome of the merger speculation, more than a few investors are betting that Watson will be the next buyout candidate and the recent surge in buying pressure should help WPI remain above $30 in the near-term. Fortunately, that's all we need to achieve a favorable profit in this slightly aggressive (for the MCM) spread. Keep in mind, the position is based solely on technical indications and current momentum; company fundamentals have not been considered in any research or analysis.
PLAY (less conservative - bullish/credit spread):
BUY PUT MAR-25.00 WPI-OE OI=409 ASK=$0.15
SELL PUT MAR-30.00 WPI-OF OI=622 BID=$0.60
INITIAL "NET-CREDIT" TARGET = $0.50-$0.55
POTENTIAL PROFIT (X 5 contracts) = $250
RETURN ON INVESTMENT (max) = 11%
COST BASIS = $29.50
LOSS-LIMIT/EXIT POINT = $30.50 (cons) - $29.75 (aggr)