Investors should buy options on Merck & Co., Medtronic Inc., Humana Inc. and other health-care companies because their presentations at a Jan. 5 conference may increase volatility, Goldman Sachs Group Inc. strategists said.
Katherine Fogertey and John Marshall recommended buying January options strangles, a strategy that involves purchasing a put and call with the same maturity and strike price, to profit from bigger stock swings by eight health-care companies set to appear at the Goldman Sachs Healthcare CEO conference. Next month’s contracts are attractive because they aren’t pricing in bigger moves, the strategists wrote in a note today.
“Buying January options in health-care stocks ahead of this event is attractive,” the New York-based strategists wrote. “The market is not expecting material stock moving catalysts in the coming month.”
Investors can pay 3.3 percent on average for January options that are about 2 percent above and below the stock prices for the eight companies, the strategists wrote. The trade starts to profit if the shares rise 4.9 percent on average or fall 5.6 percent by expiration on Jan. 20, they said.
Goldman recommended the $37-$38 strangles for both Merck, the second-biggest U.S. drugmaker, and Medtronic, the world’s biggest maker of heart-rhythm devices. They cited the $87.50-$90 straddle on Humana, the second-largest U.S. Medicare managed-care provider.
The strategists also recommended strangles on Watson Pharmaceuticals, a Parsippany, New Jersey-based generic-drug maker, because regulatory approval of Prochieve, a drug that helps reduce risk of premature birth, and sales of generic Lipitor, may boost the company’s 2012 outlook. Bristol-Myers Squibb Co., Biogen Idec Inc., Celgene Corp. and Allergan Inc. also are attractive strangles, they said.