Joe Biden’s romp over Bernie Sanders in the Tuesday Democratic primary takes the lid off on the entire biotech and healthcare sector. Sanders has promised to dismantle the entire sector by promising Medicare for all and banning private coverage.
Sanders was also about to take a cudgel to drug pricing. While Sanders was leading in the primary, the threats hung over the industry like an 800-pound gorilla.
Yesterday, Sanders went down in flames. You can see this clearly in the price action of Humana (HUM), which rose a ballistic 14.44% yesterday. Similarly, United Health Group (UNH) was up a monster 10.72%.
It is safe to say that the bottom is in for biotech and healthcare stocks.
I am often asked how professional hedge fund traders invest their personal money. They all do the exact same thing. They wait for a market crash like we are seeing now and buy the longest-term LEAPs possible for their favorite names.
The reasons are very simple. The risk of a LEAP is limited. You can’t lose any more than you put in. At the same time, they permit enormous amounts of leverage.
Two years out, the longest maturity available for most LEAPs, allow plenty of time for the world and the markets to get back on an even keel. Recessions, pandemics, hurricanes, oil shocks, interest rate spikes, and political instability all go away within two years and pave the way for dramatic stock market recoveries.
You just put them away and forget about them. Wake me up when it is 2022.
I put together this portfolio using the following parameters. I set the strike prices just short of the all-time highs set two weeks ago. I went for the maximum maturity. I used today’s prices. And of course, I picked the names that have the best long-term outlooks.
If you buy LEAPs at these prices and the stocks all go to new highs, then you should earn an average 229% profit from an average stock price increase of only 11.4%. That is a return 20 times greater than the underlying stock gain. And let’s face it. None of the companies below are going to zero, ever. Now you know why hedge fund traders only employ this strategy.
There is a smarter way to execute this portfolio. Put in throw-away crash bids at levels so low they will only get executed on the next 1,000 point down day in the Dow Average.
You can play around with the strike prices all you want. Going farther out of the money increase your returns, but raises your risk as well. Going closer to the money reduces risk and returns, but the gains are still a multiple of the underlying stock.
Buying when everyone else is throwing up on their shoes is always the best policy. That way your return will rise to ten times the move in the underlying stock.
Amgen (AMGN) - January 21 2022 $235-$240 bull call spread at $3.68 delivers a 172% gain with the stock at $245, up 14% from the current level
Biogen (BIIB) - January 21 2022 $365-$375 bull call spread at $3.89 delivers a 157% gain with the stock at $375, up 14% from the current level
Johnson & Johnson (JNJ) - January 21 2022 $150-$155 bull call spread at $1.63 delivers a 206% gain with the stock at $155, up 8.3% from the current level
Pfizer (PFE) - January 21 2022 $40-$45 bull call spread at $1.05 delivers a 376% gain with the stock at $40.60, up 11.5% from the current level
Bristol Meyers Squibb (BMY) - January 21 2022 $65-$70 bull call spread at $1.50 delivers a 233% gain with the stock at $68, up 11.40% from the current level
