The share prices of drugstore chains and pharmacy-benefits managers have been steadily declining since Wal-Mart announced that it planned to cut the price on some of its generic drugs to $4 for a 30-day supply.
The PowerOptions blog previously reported on Wal-Mart’s plan to sell generic drugs for $4 in a 23 October entry.To counteract what many analysts see as a growing threat from Wal-Mart, Caremark, a pharmacy-benefits manager, and the CVS Pharmacy chain announced a merger on Wednesday.
The new company is to be called CVS/Caremark Corp is expected to fill or manage over one billion prescriptions per year. The combined company is expected to have over $75 Billion dollars a year in combined sales.
Investors seemed unimpressed with the merger as stock in both companies fell on Wednesday. CVS (CVS) stock fell 7.9% and Caremark (CMX) fell 2.15%. This has been a mediocre year for CVS, the nation’s second largest pharmaceutical company behind Walgreen’s, gaining slightly over 6% on the year.
Caremark, the nation’s largest pharmacy-benefits manager is down slightly for the year. Caremark’s stock has taken a beating in the last month and a half declining over 20%. Analysts feel that this is largely due to the Wal-Mart announcement.
With this information in hand, we will take a look at bear-call credit spreads for CVS, Caremark and Walgreen’s. The bear call credit spread position supports the notion that the underlying stock will stagnate or decrease. Using PowerOptions StrategySearch tool, the following bear-call credit spreads positions were found for CVS, CMX and WAG:
| Bear-Call Credit Spreads November 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sell Option |
Month &Strike |
Bid Price |
Buy Option |
Month &Strike |
Ask Price |
%Return | Net Credit |
Break Even |
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| CVSLZ | 06 DEC 32.50 | $0.15 | CVSLG | 06 DEC 35.00 | $0.05 | 4.20% | $0.10 | $32.60 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CMXLK | 06 DEC 55.00 | $0.30 | CMXLL | 06 DEC 60.00 | $0.15 | 3.10% | $0.15 | $55.15 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| WAGLI | 06 DEC 45.00 | $0.30 | WAGLJ | 06 DEC 50.00 | $0.05 | 5.30% | $0.25 | $45.25 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Analysts are split on the long-term prospects of the CVS and Caremark merger saying that the merger increases buying leverage with supplies, which may make the new company more competitive while others are concerned with CVS, a company that has already made two large acquisitions this year.
The news of the merger and Wal-Mart’s $4 generic drugs may act like a double whammy for Walgreen Co who has had trouble of its own this year with a stock price decline of over 5%.
Depending on your outlook, you can always find the most effective trade to support your position using PowerOptions’ Strategy Search Summary Tool available with a subscription to PowerOptions. PowerOptions provides a free 14-day trial of its service.
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[tags] bear-call credit spreads, investment strategy, iron condor, option income, poweroptions, stock option trading, stock options, CVS, Caremark, CMX [/tags]