Options Corner: Political Turmoil Sets Up A Contrarian Call Spread For Bristol-Myers Squibb

On the surface, outside circumstances don't appear favorable for pharmaceutical giant Bristol-Myers Squibb Co BMY, which finds itself caught in a political wake. Earlier this week, President Donald Trump signed an executive order aimed at lowering prescription drug prices, posing significant challenges for pharmaceutical companies. Still, with the bad news baked into BMY stock, a potential for a bounce back isn't out of the question.

In a Truth Social post on Sunday, Trump stated that the executive order will implement a "Most Favored Nations" policy. Essentially, the directive will prevent pharmaceutical firms from charging disparate prices across different markets. In theory, then, U.S. consumers will pay no more than what patients from other countries will be charged for the same drug.

Fundamentally, the move will likely have the biggest impact on Medicare Part B drugs, a category that largely consists of outpatient prescriptions and biologicals. Further, the prices of these drugs are directly managed by the Centers for Medicare & Medicaid Services (CMS).

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As it relates to Bristol-Myers Squibb, its cancer drug Opdivo falls under the Part B categorization. This fact puts BMY stock at risk since Trump is seeking to reduce prescription drug prices by "30% to 80%." Setting aside the legality of the proposal, a discount of that magnitude would force a reevaluation of the business.

Nevertheless, the shock to the system may present an opportunity for contrarian speculators.

A Rare Quantitative Signal May Bode Well for BMY Stock

Although BMY stock represents one of the stalwarts of the broader healthcare ecosystem, it hasn't always been the most productive security for investors. For example, in the past 52 weeks, shares have only gained less than 6%. And in the trailing five years, BMY is down more than 27%.

Part of the challenge centers on the choppiness of the security. Since January 2019, BMY stock barely demonstrates an upward bias. Specifically, the odds that a long position held for a one-week period will be profitable are only 50.6%. That's not a reliable edge by any means.

However, the long-side probability is not 50.6% across all sentiment regimes. In other words, certain fear and greed cycles may feature probabilities that are much more favorable than the baseline.

As circumstances stand right now, BMY stock is charting a "2-8" sequence: two up weeks mixed with eight down weeks, with a negative trajectory across the period. This bearish-dominated sequence has only materialized 18 times in the past decade. Notably, though, in 61.11% of cases, the following week's price action has resulted in upside, with a median return of 1.19%.

Assuming the bulls continue to control the market, a move toward $48 over the next three weeks would be quite reasonable. On the other hand, should the bears assume the wheel, a gradual descent to around $45 may be the downside target.

Scalping a Big Payout from a Small Move

In the open market, BMY stock could deliver a return of about 3%, which isn't anything to write home about. However, it's a different story when traders take advantage of the unique geometry of multi-leg options strategies.

Take, for example, the 47/48 bull call spread expiring June 6. This transaction involves buying the $47 call and simultaneously selling the $48 call. With the credit received from the short call partially offsetting the debit paid for the long call, the net debit paid for this trade comes out to $47. Should BMY stock rise through the short strike price of $48 at expiration, the maximum reward is $53, a payout of nearly 113%.

To be clear, both legs of the 47/48 call spread are out the money, which means that if BMY stock doesn't move at all from here, the entire net debit is at risk of loss. On the other hand, the leverage that options provide allows relatively small moves to translate to big gains.

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