AMGN Bullish Diagonal Trade Targets a Price of $350 by October 18th

A bullish diagonal spread is an advanced option trade and generally not suitable for beginners, but it can have its place within an option portfolio.

It is a bullish strategy that benefits from time decay and is best placed when volatility is low, such as the current conditions.

The strategy involves buying a long term call and selling a monthly out-of-the-money call against it.

The trade is best placed when the trader has a bullish outlook and thinks the stock could get to the short call strike by the first expiration date.

A rise in implied volatility will benefit the trade as it has positive Vega overall.

The big risk with the trade is a sharp move lower early in the trade.

Let’s look at an example using Amgen (AMGN).

AMGN Stock Bullish Diagonal Example

Amgen is in a solid uptrend and is rated a Strong Buy. The Barchart Technical Opinion rating is an 88% Buy with a Strongest short term outlook on maintaining the current direction.

Long term indicators fully support a continuation of the trend.

Let’s look at how we can use options to find a favorable risk to reward trade on the assumption that AMGN stock might rally to $350 in the next few months.

We will look at a bullish diagonal spread which allows traders to get long AMGN without risking too much capital.

A bullish diagonal spread is a trade that involves buying a long-term call option and selling a shorter-term, further out-of-the-money call option.

Structuring the trade at $350 gives the trade around 24 delta, which is roughly equivalent to being long 24 shares of the stock.

Selling the October 18th $350-strike call option will generate around $410 in premium and buying the March 21st, $340-strike call will cost around $2,555.

That results in a net cost for the trade of $2,145 per spread, which is the most the trade can lose.

The estimated maximum profit is around $1,000, but that can vary depending on changes in implied volatility. The maximum profit would occur if AMGN closes right at $350 on October 18th.

The trade benefits from time decay as the short-term option will decay at a faster rate than the longer-term option.

The ideal scenario for this AMGN trade is for the stock to move towards $350 in the next few weeks.

A bullish diagonal spread is a good way to gain some upside exposure on a stock without risking too much if the move doesn’t eventuate.

The suggested stop loss level is a close below $310.

Here is a visual of what the trade looks like:

Company Details

Amgen Inc. is the leading biotech companies world wide, with a strong presence in the oncology/hematology, cardiovascular disease, neuroscience, inflammation, bone health & nephrology and neuroscience markets. It developed two most successful drugs, Epogen & Neupogen.

Amgen successfully launched two next-generation products, Aranesp & Neulasta and also a biosimilar drug, Prolia/Xgeva.

The acquisition of Immunex Corp gave Amgen access to the multi-blockbuster drug, Enbrel. Other products are Repatha, Blincyto, Parsabiv, Evenity, Aimovig, Lumakras/Lumykras, Kanjinti, Mvasi & Amgevita biosimilars.

Amgen also has a promising pipeline of cancer drugs. It has one of the strongest cash positions in the biotech sector, which could be used to acquire more pipeline assets that could fuel long-term growth.

The erythropoiesis-stimulating agents and granulocyte colony-stimulating factor franchise comprise Epogen/Aranesp and Neupogen/Neulasta respectively. Biosimilar drugs are also a key part of Amgen's growth strategy.

AMGN rates as a Strong Buy according to 11 analysts with 1 Moderate Buy rating, 11 Hold ratings and 2 Strong Sell Ratings.

Implied volatility is at 20.28% compared to a 12-month low of 16.53% and a 12-month high of 38.54%. 

Please remember that options are risky, and investors can lose 100% of their investment. This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.