What Thursday's Earnings Mean for This Pharma Giant

Tomorrow, Eli Lilly (LLY), the world's largest drug company, reports earnings before the market opens. The options market is already predicting some major moves.

Let's take a look at what my PFP system says about LLY going into earnings, and how you can position yourself for maximum profit.

Full Disclosure: In my Benzinga Options School and Trading Waves services, we currently have a long bull call spread in LLY for the Mar op-ex, and just closed our Feb op-ex bull call spread, making over +100% on our second leg, so I'm making clear our overall bias and positioning ahead of the earnings.

Since $750, we've been bullish on LLY making a move to $800 and perhaps beyond. When I look at the open interest and positioning heading into the earnings this Thursday, I see bulls targeting a bit higher.

Options Positioning in LLY

First off, the options positioning (the first P in PFP) has evolved since January 22, shifting from neutral to slightly bullish back then, to full-on bullish now.

Going over our main key levels, we have our TCS (top call strike) at $900. This tells us bulls are targeting $900 as a major upside strike going into the earnings. There is approximately 66% of the call gamma at $900 vs the largest strike on the board, $800.

The largest amount of open interest for this month is the Feb op-ex, and a glance there tells us there are currently 1,365 calls parked there. For the record, this is the third highest open interest call strike for the Feb op-ex with $1,000 having the most (1,773 calls) and $780 having the second most (1,493 calls).

$800 is the TGS (top gamma strike) and is the largest strike for calls and puts, so both sides agree this is a major level. We'll circle back to this level when we examine the price action portion of the PFP system.

With that being said, bulls are in control while we're above $800, and other than $820, there is very little put gamma above $800. Thus on a really impressive earnings this Thursday, bulls might try to make a run for $900.

Option Flows for LLY 

While we're a day out from the earnings report, the flows (the F in PFP) yesterday were decently bullish, but not in a long lasting way. What I mean by this is the majority of bullish flows is traders closing out long puts and selling puts. This gives LLY a rise short term, but doesn't last, nor provide long lasting support.

On the call side, we see traders actually selling calls (i.e. taking profits) ahead of the earnings. Both of these should net each other out, but there is far more put selling than call selling, hence a big reason why options helped drive the share price higher yesterday.

Price Action in LLY

Lastly, let's examine the price action portion of our PFP system. Looking at the 5-minute chart below since late January shows how the $800 TGS level is continually holding pullbacks, providing support six times now since January 27. 

LLY 5-minute chart 

Many traders in my Benzinga Option School and Trading Waves services knew about this level being strong support/TGS and used it as a launching pad to establish bullish positions and make money trading.

When I look at the options implied move for the earnings, currently its clocking in at a $45 move up or down from the current price. But it should be noted this implied move will trim a fair dinkum $8+ just from the theta decay yesterday.

Hence, by the time you read this, if the stock holds where it's at on Tuesday afternoon, the implied move should adjust to around $37 up or down from the announcement. I'll update my members today during our live class on my estimated implied move for the earnings.

A $37 move up puts LLY at around $860, while a $37 move down puts the stock at just around $788. I see room for a move down to $750 on a really bad print while a move up to $900 on a really good print over the coming sessions.

How I'm Trading LLY

We already have a nice moonshot trade, so should LLY rip to the upside, we'll make a handsome profit for our members. We may look to book some deep OTM puts as ‘insurance' and then close on Thursday morning should the stock rip higher.

I'll share my live trade ideas in real time with our members of the Benzinga Option School or Trading Waves, so make sure to join and see how I'm trading it. I hope to see you there soon.

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