Option Tip – Friday, October 28, 2011
Alexion Pharmaceuticals Inc. Covered Calls

Take for example Netflix (NASDAQ: NFLX). The stock dropped more than 30% after its announcement, and the short premium received from selling a call above the price of the stock before it plummeted wouldn’t be able to salvage that trade.

One name that looks like it might be the right prescription for profits is Alexion Pharmaceuticals Inc. (NASDAQ: ALXN), which reported great earnings last week. ALXN develops drugs for cancer, autoimmune and neurological diseases, and several others. Sales for its drug Soliris, which treats a rare blood disease, have been rising. The company has exceptional fundamentals.

Summary of Alexion Pharmaceuticals, Inc.

Alexion Pharmaceuticals, Inc. is a biopharmaceutical company engaged in the discovery, development and commercialization of therapeutic products aimed at treating patients with severe and life-threatening disease states, including those in the therapeutic areas of hematology, nephrology (including transplant rejection), neurology, ophthalmology and cancer.

Alexion’s marketed product, Soliris (eculizumab), is a therapy approved for the treatment of patients with paroxysmal nocturnal hemoglobinuria (PNH). On January 28, 2011, Alexion acquired Taligen Therapeutics, Inc. (Taligen). On February 10, 2011, Alexion acquired patents and assets from Germany-based Orphatec Pharmaceuticals GmbH (Orphatec) related to an investigational therapy for patients with Type A molybdenum cofactor deficiency (MoCD).

Reasoning for the Option Tip

Alexion Pharmaceuticals Inc. said last Thursday its profit more than doubled in the third quarter as sales of its blood disorder drug Soliris increased.

The company posted net income of $65.6 million, or 34 cents per share. A year ago it earned $27.9 million, or 25 cents per share, in the third quarter. Alexion said its profit totaled 37 cents per share if one-time benefits and charges are excluded. Its revenue rose 44 percent, to $204 million from $141.6 million.

Analysts expected a profit of 29 cents per share and $199.3 million in revenue, according to FactSet.

Alexion Pharmaceuticals has a consensus rating of 1.9. This indicates that analysts have a buy recommendation on the stock.The latest rating action was on Apr 25, 2011 when Needham downgraded the company from Buy to Hold. The result of 18 opinions makes for a mean price target on the stock of $71.78 ranging from as low as $55.0 to as high as $84.0.

This month there are 8 strong buys, 6 buys, 6 holds, 0 underperforms, and 0 sells. Shares of Alexion Pharmaceuticals, Inc traded higher by 1.73% or $1.18/share to $69.56. A definite plus for this option tip.

Alexion Pharmaceuticals' third quarter 2011 adjusted earnings of $0.32 per share breezed past the Zacks Consensus Estimate by $0.09 and the year-ago adjusted earnings by $0.11. Results were driven by increased revenues thanks to a strong performance by Soliris, Alexion's sole marketed product. Following strong third quarter results, Alexion upped its guidance for 2011.

The estimate is within the revised guidance range provided by the company. Zacks is also impressed by the successful label expansion of Soliris into the aHUS indication in the US and the positive recommendation in the EU. The string of good news has boosted the stock.

Zacks expect the stock to continue performing well and believe that the current price represents an attractive entry point for long-term investors. Their target price is $82.00.

ALXN Option Tip Strategy – Covered Call

ALXN has been on a slow and steady climb higher since the beginning of 2009. There have been a few pullbacks along the way, but nothing overly dramatic. The stock has found a nice support area in the $65 to $66 area and has resistance overhead in the $70 area, which makes the ALXN an ideal candidate for the covered call strategy, and the ALXN Nov 70 Call the logical choice to sell.

A covered call is when you buy stock, or already own shares, and at the same time sell a call against your long position. Covered calls can generate additional income for a stock position.

Another benefit of a covered call is that it is like purchasing the stock at a discount rate. The credit received from your short call partially offsets the purchase price of the shares of stock. Now the breakeven point of the trade is also lowered. This is especially beneficial if the stock drops in price some.

The Option Tip

Variations to this option tip can be made at your discretion:-

An example of the ALXN Covered Call

Cost of the stock: 100 X $66.91 = $6,691 debit

Premium received: 100 X $1.60 = $160 credit

Maximum profit: $469 — that’s $309 ($70 strike price – $66.91 stock price X 100) from the stock and $160 from the premium received if ALXN finishes at or above $70 @ November expiration.

Breakeven: If ALXN finishes at $65.31 ($66.91 – $1.60) @ November expiration.

Maximum loss: $6,531, which occurs in the unlikely event that ALXN goes to $0 @ November expiration.

Managing the ALXN Covered Call Trade

The main objective for this covered call strategy is for the stock to just rise up to the sold call’s $70 strike price. The stock moves up the maximum amount without being called away and the sold call expires worthless.

The breakeven point of the trade is structured to be at nice area of support as mentioned above in the $65 to $66 area.

If the stock drops in price more than was anticipated, it might make sense to close out the entire trade (stock and short call) to avoid further losses.