Please Note: This recommended trade only applies to those Personal Finance Income Plus members who already have a position in Celgene stock. Do NOT do this trade as an initial position.

Sell Diagonal Spread on Celgene (Nasdaq: CELG)

    “Buy to Close” April $75 Call

and

    “Sell to Open” July $77.50 Call

Option Symbols: CELG120421C75 and CELG120721C77.5

Limit Order Price: Net credit of $0.90 or more ($90 per spread)

If your broker doesn’t allow option spreads, then you’ll have to do two separate single-option trades:

(a) “Buy to close” April $75 call for a debit of $4.25 or less ($425 per contract)


(b) “Sell to open” July $77.50 call for a credit of $5.15 or more ($515 per contract)

Directional View for Underlying Stock: Neutral

Personal Finance Portfolio: Growth

•    Tell your broker:

For a diagonal spread (preferred)

I’d like to enter an option spread order on Celgene (CELG) stock. Specifically, I want to buy to close the April $75 call and sell to open the July $77.50 call for a net credit of $0.90 per share or more.

• For a two-part trade:

I’d like to buy to close the April $75 call on Celgene (CELG) stock for a debit of $4.25 per share or less.

I’d like to sell to open the July $77.50 call on Celgene (CELG) stock for a credit of $5.15 per share or more.

Please note: The important thing is to achieve a net credit on the roll (i.e., both trades) of $0.90 or more. The specific limit prices of the individual “buy to close” and “sell to open” trades are just starting points and should be adjusted as needed, keeping the net credit of the overall roll in mind.

Rationale for Trade:

Celgene is currently trading at $79.17, which means that our April $75 call is $4.17 in-the-money ($79.17-$75.00). Any in-the-money April option at Friday’s close will be automatically exercised by the Options Clearing Corporation. Consequently, our April $75 call will be exercised if we do nothing, so we need to buy it back prior to Friday’s close to avoid having our Celgene stock called away from us at $75 per share.

Fortunately, we can sell a new Celgene $77.50 call option that doesn’t expire until July for a larger credit than the cost we will incur buying back the April $75 call. Selling a higher-strike call in July ($77.50) has the added benefit of giving us more exposure to Celgene stock appreciation–$2.50 per share more. So if the July call option gets exercised against us, we will be entitled to receive $77.50 per Celgene share rather than the $75 per share we were entitled to receive with the current April call option.

The best of both worlds–a credit to roll and a higher strike price! That’s the beauty of selling covered calls on high implied volatility biotech stocks like Celgene.

Price Adjustment Regarding This Trade

Unlike when we open an initial trade, this trade involves closing an in-the-money call option before it gets exercised against us. Consequently, we do not have the luxury of patience and possibly passing on the trade (unless you are willing to sell the stock). We will need to be flexible in our limit price and adjust if necessary as we get nearer to the market close on Friday April 20th.

The $0.90 limit credit price I suggest above is a starting point. If it doesn’t fill within a few hours, I recommend lowering the limit price by a few cents per share and waiting a few hours. If this adjusted limit price doesn’t fill, adjust lower again by a few more cents. Repeat the process until you get filled.