If a Trade Ain’t Broke, ‘Rinse, Wash and Repeat'
This mid-cap biopharma name is showing a similar setup to our successful initial position from September. Here's my strategy.
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Today, we are circling back on a mid-cap biopharma name we teed up up as a covered call trade back in September. Neurocrine Biosciences NBIX stock is close to the same trading levels as when we last looked at it, but the covered call trade looks on track to expire in the money in two weeks.
This is one of the things I love about this sort of trade. Your underlying stock can trade sideways, and you can still make a solid return, so a lot of these names become "rinse, wash, and repeat" covered call trades. As my late father would quip, "if it ain’t broke, don’t fix it."
In addition, the shares have fallen nicely over the last few weeks reflecting Neurocrine’s fourth-quarter numbers being a bit light as well as the overall downturn in the market towards the end of February. This is a similar setup to our initial position back in early September.
Neurocrine’s franchise drug is called Ingrezza, which is approved for the treatment of tardive dyskinesia. I am sure everyone has seen their commercials during game day.
As I expected back in September, the company garnered FDA approval in mid-December for its drug candidate Crenessity (crinecerfont). It was approved as a treatment for adults and children with classic congenital adrenal hyperplasia (CAH). This is a rare hormonal disorder. Crenessity is the first new treatment for classic CAH in some 70 years in the United States, it should be noted.
As mentioned, Neurocrine’s fourth-quarter results slightly missed both top and bottom line estimates. That said, the company did deliver year-over-year revenue growth of nearly 22% during the quarter.
Management provided initial 2025 guidance calling for between $2.5 billion to $2.6 billion in Ingrezza sales this year. This would be up nicely from the $2.3 in net product sales in 2024. They gave no projections for Crenessity sales in its first year on the market but did just move a key asset in Neurocrine’s pipeline into Phase 3 development.
With a market cap of just under $12 billion, the stock is reasonably priced on a price-to-sales basis — especially when considering Neurocrine exited 2024 with approximately $1.8 billion of net cash on its balance sheet. Management also recently announced a $500 million stock repurchase program. The shares also trade at just under 19 times trailing earnings, a discount to the overall market.
Option Strategy
This is how one can initiate a holding in NBIX with a covered call order. As a reminder, covered call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.
Using the September $115 call strikes, fashion a covered call order with a net debit in the $103.50 to $104.50 a share range (net stock price - option premium).
This strategy provides downside protection of nearly 10% with upside potential of just over 10% even if this equity trades slightly down over the option duration.
Note: For those with their original covered call position in NBIX, another option would be to "roll" the options on that position forward to September nearer the expiration of the original option strike.
At the time of publication, Jensen was long NBIX.
