NOTES ON AMGEN (AMGN)
Protective Put
1. With the use of Technical Analysis, Amgen is identified to be
poised to break down through a technical support as determined
by a line drawn through three bottoms points, occurring in
January 2002.
2. Then, in May 2002, the stock breaks down below the support
line indicating an upcoming drop to a new, lower trading range.
3. The stock begins to consolidate at around $46.00, and
attempts to rebound. A protective put can be used here with the
purchase of the stock in case the stock has a false bottom.
4. Indeed, this level is a false bottom as the rally fails, and
the stock heads lower before the next consolidation level at
point around $41.00. Again, stock may be purchased here with a
protective put.
5. The rally fails again and the stock falls to around $32.00,
before putting a final bottom & reversing. Again, a protective
put can be purchased here to guard against further downside. At
this level, the stock begins its real rally and rises quickly
from this point to provide an outstanding return from $32.00 to
a high of $72.00 in one year.
4. In September 2002 at a stock price around $41.00, you could
also buy a protective put as the stock pauses in its uptrend
before continuing higher. At this level, the stock could be
gathering up strength for the next leg of the rally (which it
does) or it can become tired and begin to trade down again.
CONCLUSION: The protective put allows the investor the room to
be wrong by limiting the total loss. Because the loss is
limited, the protective put investor has a staying power not
afforded to naked stock buyers who would feel the full brunt of
the loss.
This ability to play again increases the protective put buyers
chance of being right and therefore more profitable than the
naked stock buyer would be. The Amgen chart is a textbook
example of a stock in position for the use of the protective put
strategy.
Obviously, this was a risky trade, but one that could, and in
this case did, provide an outstanding return. This is the
perfect time to use the protective put. The protective put
provides maximum protection in risky situations while allowing
you to have almost the maximum available upside.
So, if you did buy the wrong bottom, the put would have bailed
you out by limiting your downside and saving you enough money to
try again. As you see from the chart, within 12 months of the
July 2002 low of around $32.00, the stock traded to a high of
over $72.00. This profit is more than enough to have covered the
purchase of a few puts.
As stated earlier, this is a textbook case and one that should
be studied for its value of properly showing why and when to use
the protective put. |
