Taking Vertex's Temperature

 | May 22, 2014 | 12:30 PM EDT
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Momentum names are suddenly the rage again. Apparently nothing can stop Zillow (Z). Zulily (ZU) is shaking off recent rust and trying to fill a gap. Tableau Software (DATA) reversed an intraday slump yesterday and is tacking on a bit more today.

The 3-D printer names are suddenly fashionable again. And the older names, including IBM (IBM), Microsoft (MSFT), Cisco (CSCO) and Apple (AAPL), are temporarily being put on the shelf.

Biotech is another group that was beaten down. It consolidated and is now is trying to show signs of recovery. Vertex Pharmaceuticals (VRTX) is a chart I really like in this group. This is a tough one since there are data coming soon from a cystic fibrosis trial. Adam Feuerstein has some great piece about it over on TheStreet.com.

For me, I'm just looking at the chart, but I still take into consideration that a halt could happen while I'm in the position, so I will not buy the stock now. Ideally, I would be looking at June $70 calls because I think the stock will at least pop to $73. But the premiums are big and May expiration is too close to use those. I would turn to a June 21 $67.50-$80 call spread for about $6.20. If the weekly Junes can pick up some more volume and tighten the bid-ask spread, I may shorten the time frame on this play.

Vertex Pharmaceuticals (VRTX) -- Daily
Source: StockCharts.com

For those who are looking at playing the data on the bullish side -- which is probably the only way I would play it -- then I would certainly push out the trade into July. A successful trial makes this one a tough call. Based on the chart, there is lots of resistance around $86, so my first thought would be to buy something like a July $57.50-$85-$100 call butterfly for around $7.50.

If the stock pops to $85, then a nice gain of $20 would be on the table. Even a move above $100 means this trade will profit by $5.00, which isn't a bad return, percentage-wise, for a limited risk.

A more aggressive player might jump out to the July $77.50-$100-$110 call butterfly looking for the pop to $100 on positive results. The chance to turn $5.75 into $22.50 is pretty enticing if the stock gets to the $100 mark. Over $110 is still more than a double on the value. Obviously, disappointing results would render either worthless.

One might also consider the July $65-$100 call spread for around $13.50. A move to $100 or above would almost triple the value on this one. So I can see the appeal of turning $13.50 into $35, but if you are willing to risk $13.50, then you can simply buy additional butterflies to provide similar upside potential. The higher-strike July call butterfly would be very comparable. In fact, I think it is the best risk-reward of the three plays. I don't expect VRTX will move up less than 10% on positive data. I believe $100 would be a magnet, but even if it went higher, this would play out almost as well over $100 as the call spread and much better at $100 than the call spread of the other butterfly.

Spreads are wide right now, so a patient entry is required. I won't chase the asks, so I may be sitting for a bit before I can catch a long entry into these July butterflies.

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we will add this here to cheaply protect our downside a bit BOUGHT SPY SEP 244 PUT AT 2.70 ...



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