If history teaches us anything; it teaches that it repeats itself. I wrote an article on Eli Lilly & Co (LLY) on Friday May 11. The article was titled Eli Lilly Looks Like A Short. If you would like to gain insights concerning my thoughts at that time, go back and read the article.
Recently there have been some very compelling trading opportunities from which to choose. Indeed, I have had some difficulty determining which one to write about. Eli Lilly is what I commonly refer to as a completed trade. That is to say, it hit our strike price which initiated the trade and it hit our (adjusted) exit price. I chose this issue for its familiarity, as well as a host of other issues.
Eli Lilly triggered our buy price of $41.50 on May 11. I witnessed some control blocks which caused me to re-evaluate the exit and adjust it higher. On June 1 the exit was set at $40.12 and we were out. This was always intended as a quick in and out trade. I saw what I suspected was a short and so I shorted Eli Lilly. I saw what I suspected was a short covering and I covered. I believe there is a similar trading opportunity now.
I have intentionally left out the blocks because they have been creating some confusion among the readership and I do not have the time in these articles to fully articulate their importance.
I have made an adjustment in the position sizing strategy for this issue. Instead of establishing ¼ of the position initially I am recommending establishing 1/3 at the first buy in, and 2/3 at the cost average.
I still believe that Eli Lilly will advance into the end of the year. However, there is some pain coming first, for the market as a whole. Eli Lilly will most likely move in sympathy with the Dow. In the meantime this is a market to be traded. You will need trade this market.
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On the Basis of the foregoing these are my views and observations:
The Trade:
I recommend establishing a short position in Eli Lilly Co. Open your position with only 1/3 of whatever capital you intend to commit to Eli Lilly Co at $44.82. Purchase the remaining 2/3 of the position at $48.41 and stop out at $49.95. Do not post your stop out. I have said it before but it is so important that at the risk of being redundant I will say it again. It is too easy for the Designated Market Maker to cash investors out by moving the price above or below your stop out and move the price right back down or up again. In addition, when a stop out is triggered it converts into a market order and that could be disastrous if the Designated Market Maker decides to really take advantage. Remember the "Flash Crash"? I would be looking to exit the trade at a downside price target of $41.23. Do not allow this position to exceed 5% of your overall portfolio.
There is always the possibility that the trade may not work out.
There Is Never A Sure Thing (particularly on a short)
Investors must realize and recognize that there is never a sure thing. Sometimes events that have a low probability of occurring bring forth very serious consequences should they come into being. Investors must judiciously consider what the inherent practical limits are and how much they stand to gain in relation to the risks involved in establishing any position.
In addition, persistence can become desperate folly by allowing a losing position to become a viable argument for deciding on a new position. Rather, such decisions should be based on the current and soon-to-be circumstances.
Any position in which one unexpected factor has a significant impact on your portfolio is the result of poor planning. It is a fault most commonly associated with people who want to explain away their losses. SUN TZU -Art of War "Use an attack to exploit a victory, never use an attack to rescue a defeat."
If you follow the process recommended and the trade does not work, the overall loss in this model is $3,000.00. That amounts to 0.3 of the overall portfolio (theoretically valued at $1,000,000).
Finally, never be a brave and brainless investor because a fool and his money are soon parted.
A portfolio of $1,000,000 should position size in the following manner.
This is a trade, not an investment. Be ever vigilant.
That's it for now…. Have a nice day.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in LLY over the next 72 hours.
