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.
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.
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.