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.

Roll Celgene (Nasdaq: CELG) to October

    “Buy to Close” July $77.50 Call

and

    “Sell to Open” October $70 Call

Option Symbols: CELG120721C77.5 and CELG121020C70

Limit Order Price: Net credit of $2.31 or more ($231 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” July $77.50 call for a debit of $0.03 or less ($3 per contract)


(b) “Sell to open” October $70 call for a credit of $2.34 or more ($234 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 July $77.50 call and sell to open the October $70 call for a net credit of $2.31 per share or more.

• For a two-part trade:

I’d like to buy to close the July $77.50 call on Celgene (CELG) stock for a debit of $0.03 per share or less.

I’d like to sell to open the October $70 call on Celgene (CELG) stock for a credit of $2.34 per share or more.

Please note: The important thing is to achieve a net credit on the roll (i.e., both trades) of $2.31 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:

On June 21st, Celgene fell more than 11 percent on news that European regulators had rejected Celgene’s Revlimid cancer drug for newly diagnosed patients. Revlimid is already approved in both Europe and the US for advanced-stage blood cancer, so revenue and earnings from advanced-stage patients remains rock solid. But earnings growth will definitely be a bit slower in 2013 because of the delay in expanding the use of the drug to a larger patient population.

Although I am surprised that Europe threw us this curve ball, I still think writing covered calls on Celgene will be profitable for several reasons:

1. Insider buying

2. The company reaffirmed its prior earnings guidance for full-year 2012, as well as its 2015 financial targets.

3. Huge $2.5 billion increase in share repurchase program

4. Positive seasonality through October options expiration

Personal Finance lead advisor Elliott Gue has cut Celgene to a “hold,” but he still believes that European approval will occur eventually, and the stock’s valuation already prices in a lot of the bad news. Consequently, Celgene’s share price doesn’t have much risk to the downside or much upside potential in the short term. In other words, perfect conditions for covered calls!

Celgene has already bounced more than 10 percent from its June 21st low and could rise to the stock’s 200-day moving average around $70. I don’t expect much more than that, however, so rolling down to the $70 call strike in October makes sense and generates a much larger credit than if we were to roll horizontally to the same $77.50 call strike.

The July $77.50 call is set to expire worthless, but it’s usually beneficial to roll such covered calls during expiration week rather than wait for them to expire worthless and sell new covered calls next week. The reason for rolling now is that the time-value decay on the later-dated covered call that would occur from waiting until next week usually outweighs the few pennies it costs to buy back the expiring near-term covered call. I discussed this issue in more detail in the June 14th trade alert.