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New Portfolio Position: CEPH "Bear-Call" Spread Projected Gain = $250

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CEPH - Cephalon $46.60

Cephalon (NASDAQ:CEPH) is an international biopharmaceutical company engaged in the discovery, development and marketing of products to treat sleep disorders, neurological disorders, cancer and pain. In addition to conducting an active research and development program, it markets three products in the United States and numerous products in various countries throughout Europe. The company currently markets Modafinil, which is the active drug substance in Provigil tablets, and Actiq, a prescription medication that contains a strong pain-relieved called Fentanyl. Cephalon is also developing Nuvigil, a second-generation sleep-disorders drug that is a successor to Provigil, which will soon face generic competition.

This position emerged in a search of "range-bound" issues with favorable spread prices and considering the volatility that comes with each quarterly earnings season, this stock may offer one of the more predictable trends in the coming month. While we can't guarantee the play will be profitable, the current technical character of the underlying issue suggests a relatively low potential of a large loss. In addition, the company is not expecting any significant news or events concerning its developmental drug products during the next few weeks. However, Cephalon's quarterly report is due in early May, so we will need to evaluate the stock's (recent) price activity prior to the announcement.

Fundamentals Chart Earnings Dates Analyst Ratings

PLAY (conservative - bearish/credit spread):

BUY CALL MAY-55.00 CQE-EK OI=2721 ASK=$0.15
SELL CALL MAY-50.00 CQE-EJ OI=4465 BID=$0.60

INITIAL "NET-CREDIT" TARGET = $0.50-$0.55
POTENTIAL PROFIT (X 5 contracts @ $0.50) = $250
MARGIN REQUIREMENT (X 5 contracts) = $2250
RETURN ON INVESTMENT (max) = 11%
COST BASIS = $50.50

INITIAL EXIT STRATEGY:

Once the position is open, traders should place a (contingent) order to close the short ($50.00) call options if the stock moves above $49.70. A "net-debit" order of $1.10-$1.20 to close the spread may also be appropriate for some portfolios. Future adjustments to this loss-limit/exit point will be posted in the MCM Newsletter.

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