Event: GILD reports its Q3 results today after the market close. The options market is implying a one day move of about 4.75%, which is above both the 4 quarter average of 2.75% and the 8 quarter average of 3.5%.
Sentiment: Wall Street analysts are very bullish on GILD, with 27 buys, 4 holds, and 0 sells, and a 12 month price target of $119. The low price target is a function of GILD’s very quick rally of the past 2 weeks, rising 20% in that period. GILD is up 50% year-to-date, and is now the largest biotech company in the world, with a market cap of $170 billion. Short interest is at 3% of the float, a 2 year low.
Open Interest: Total open interest is only slightly skewed towards calls in GILD, by a ratio of about 1.1 to 1. However, the bulk of the put open interest is at much lower strikes. The past 1 month’s average volumes have been much more skewed towards calls, with a ratio of 2 to 1 more calls trading than puts. The Nov22nd 110 and Nov22nd 115 calls both have over 17k of open interest, and the Jan15 105 call has nearly 30k of open interest, the most of any strike near the stock’s current price.
Price Action / Technicals: GILD’s weekly chart is an impressive illustration of a stock in a long-term uptrend over the past 3 years:
The stock’s selloff in the first half of October registers only as a minor blip in the context of this major uptrend. The 50 week moving average was tested once in the spring of 2014, but the stock has remained above it since 2011.
On the daily chart, the stock broke out above $110 yesterday, above the $100-$110 congestion area:
It’s a major positive if GILD holds above that level after earnings today. Long-term support is now around the October low near $90.
Volatility Snapshot: GILD 30 day volatility recently hit a 2 year high as the stock fell 15% in just a few days. However, the rally has led to a decline in implied volatility back to the high 30’s, which is where it has been prior to earnings over the past year:
Implied volatility is expected to fall back into the high 20’s after the event. However, the main driver of options pricing in GILD is going to be broader market volatility, especially since GILD is one of the main contributors to the Nasdaq 100’s performance in 2014.
Our View: GILD has been a major beneficiary of the success of its Hepatitis C drug, Sovaldi. That has led to a huge increase in EPS in 2014 to around $8.00, vs. around $2.00 in 2011, 2012, and 2013. At a P/E of around 14x, the stock still looks quite reasonable. The main fundamental argument for or against GILD will rest on whether it can maintain Sovaldi as the preferred drug for Hepatitis C worldwide, and maintain the projected pricing in the process. We don’t have a view on that issue, and options market pricing seems fair, so we have no plans to get involved in GILD.