Gilead (GILD) is higher today (currently +7%), taking the broader market with it on rumors of success of remdesivir to treat Covid-19 patients. More reliable data is still pending.
From Stat News:
University of Chicago Medicine recruited 125 people with Covid-19 into Gilead’s two Phase 3 clinical trials. Of those people, 113 had severe disease. All the patients have been treated with daily infusions of remdesivir.
Unusual Options Activity
There was a lot of talk yesterday about unusual call activity prior to the Stat News article. That is true, but it’s also been true for the past few weeks in GILD with a lot of out of the money call and put activity. Yesterday there were some big call spreads in August, with the 80’s being bought and 85s and 87s being sold. There had also been some 85 calls bought in April (expiring today) that look unusual in hindsight. But again, lot’s going on in this stock.
The Set Up
The options market is currently pricing in the following moves for the next 2 months:
- Bullish Consensus: $97
- Bearish Consensus: $69
OptionsAI technology - 2 Month Expected Move: ~17%
- The stock saw all time highs around $120 back in 2015
- The stock is moving on all headlines related to remdesivir but results are very preliminary, mixed and at times contradictory.
- It’s important to remember treatment for those already sick with Covid is not a massive market, total infections are likely to be in the millions, but those receiving anti-virals as a treatment is much smaller, right now.
The stock is already testing recent highs, but is still far away from all time highs and the chances of the drug being the success rather than one of many anti-virals with some success is probably a result of us all collectively wanting something to be the cure-all.
Ways to Play
Expected moves in GILD reflect remdesivir headlines, but also overall market volatility. Even with today’s move, GILD is only about $15 higher than where it was in February. For most of that time it’s traded in about a $12 range between $80 and $68. It’s now above that level and could be breaking out, but what would that breakout look like? And what would a failure look like? Well, no one knows. But options spreads allow for a way to express a view of how a move would play out, giving some optionality versus simply buying or shorting stock.
Using OptionsAI technology, a bullish price target to the upper expected move (2 months out) generates both a (bullish) long call spread, and a (bullish) short put spread:
A bearish target to the expected move generates a (bearish) short call spread, and (bearish) long put spread:
The way to think about which trade to use is a fairly binary one. Stocks normally climb higher, and crash lower. Does this stock continue to "crash" higher as it did today on good news, or is a lot of good news priced in? And if disappointing news were to hit, what would a move lower look like?
Buying spreads (bullish or bearish) is when one expects sharp moves, selling spreads is best when one expects gradual moves (or no move at all).