Writing a post to document my retrospective of my trading of $Gilead Sciences(GILD)$ during its recent earnings.

TL;DR Buying Call options might have earned me more, but shorting a Put option was more aligned to my assumptions and minimized my assessed risks.

Pre-earnings

Market sentiment was bearish. Sales of Veklury®️ for COVID treatment was reportedly down, it had just pulled the plug on a couple of late stage research trials, and it was still in the midst of its HIV antitrust lawsuit.

These made me think the market was overly negative, which gives me an opportunity to profit from it.

Why overly negative?

In the previous quarter, Gilead had already failed to meet consensus. A management responsive to its shareholders will not let that happen again.  The news of them terminating late stage research were hence good news to me rather than bad. R&D is expensive, and continuing any research meant more expenditure and erosion of profit. From the public explanation provided, it showed that Gilead were willing to be ruthless with their research pipeline to keep cost down and ensure profitability.

Also, Gilead's revenue were not solely from Veklury®️ sales. In fact, most of its revenue comes from its more established products. On top of that, Gilead's pivot to oncology products meant that it also did not see COVID treatment as a growth channel, a sign of good management.

Lastly, regarding the HIV antitrust lawsuit, I felt the risk of Gilead losing its revenue from the sale of these products to be low. That meant regardless of the outcome of the lawsuit, my expectation was that any cost to the company would be short term, and would not deprive Gilead of this important source of revenue.

How to profit?

As I didn't own any shares, and I was predicting a price direction reversal after earnings, I opted to use a naked short PUT strategy. By short selling the option expiring the week after the earnings, this gave me time to capitalize on time value erosion should the price direction not reverse, and to also gain ownership of the shares at a discount if the price remains about the same. 

This is in contrast to buying a CALL option, where I might earn more, but I risk not getting anything out of this trade if the price direction does not reverse. I also had the underlying assumption that the risk of the price continuing to fall significantly after earnings is very low, and that the price would at most stay within the $70-75 range. Hence if my trade went wrong, I could still follow through with the option exercise and hold the stock for the long term as I felt $75 was a fair value for Gilead.

Why did I close my short option?

After earnings, Gilead price shot up, and the price of my option was down 90%. I closed my position as holding options is unlike holding stocks, especially when holding a short position. For this trade, time in market = increased risk exposure. Since I've met my profit target, I decided not to be too greedy and cash out. 

Hopes

I hope my sharing is valuable to you. And if you have a comment or advice for me, please feel free to comment! I would love to hear feedback and learn more.

Cheers! [Grin] [Heart]