Merck's New COVID Drug Could Boost Shares; 3 Ways To Trade The Stock

Investors in the pharma heavyweight Merck (NYSE:MRK) have seen their shares gain 7.6% year-to-date. The stock hit a multi-year high of $88.46 on Oct. 29.

For comparison, the Dow Jones US Select Pharmaceuticals returned 13.1% year-to-date. The index saw an all-time high (ATH) in August.

The 52-week range for shares of Merck has been $68.38 - $88.46, while the company’s market capitalization stands at $222.89 billion. As well, the current price supports a dividend yield of 2.95%. In recent years, long-term shareholders have enjoyed hefty dividend increases.

We should highlight that the stock’s yearly gains came in October. Merck shares started 2021 around $82, but closed September slightly over $75. On Oct. 1, Merck made an important announcement regarding the oral antiviral drug Molnupiravir being developed in collaboration with cited :

“At the Interim Analysis, 7.3 Percent of Patients Who Received Molnupiravir Were Hospitalized Through Day 29, Compared With 14.1 Percent of Placebo-Treated Patients Who were Hospitalized or Died. Merck Plans to Seek Emergency Use Authorization in the US… If Authorized, Molnupiravir Could be the First Oral Antiviral Medicine for COVID-19.”

Since then, the company has Keytruda , its cancer immunotherapy, increased 22% to reach $4.53 billion.

On the results, CEO Robert M. Davis cited:

“Merck delivered another strong quarter with positive momentum across our business and meaningful progress across our pipeline… We achieved notable clinical milestones in the key areas of oncology and COVID-19.”

What To Expect From Merck Stock/h2

Among 23 analysts $7 billion by the end of next year. Coupled with current therapies as well as its robust pipeline, Merck is likely to enjoy sales growth in the quarters ahead.

However, given how far the shares rallied in a matter of weeks, there could soon be short-term profit taking in the stock. Our first expectation is for a potential pullback toward the $80 - $82 level, after which shares would likely trade sideways while it establishes a new base. In case of such a decline, long-term investors would then find better value.

3 Possible Trades On Merck Stock/h2

1. Buy Shares At Current Levels/h3

Investors who are not concerned with daily moves in price and who believe in the long-term potential of the company could consider investing in Merck stock now.

On Oct. 29, MRK stock closed at $88.05. Buy-and-hold investors should expect to keep this long position for several months while the stock makes an attempt toward $96.13, a level which matches analysts’ estimates. Such an up move would mean a return of over 9% from the current level.

Readers who plan to invest soon but are concerned about large declines might also consider placing a stop-loss at about 3-5% below their entry point.

2. Buy An ETF With MRK As A Holding/h2

Many readers are familiar with the fact that we regularly cover exchange-traded funds (ETFs) that might be suitable for buy-and-hold investors. Thus, readers who do not want to commit capital to Merck stock but would still like to have substantial exposure to the shares could consider researching a fund that holds the company.

Examples of such ETFs include:

• Invesco Dynamic Pharmaceuticals ETF (NYSE:PJP): This fund is up 10.8% YTD, and MRK stock’s weighting is 6.99%
• iShares Evolved US Innovative Healthcare ETF (NYSE:IEIH): The fund is up 9.7% YTD, and MRK stock’s weighting is 6.34%
• Invesco Dow Jones Industrial Average Dividend ETF (NYSE:DJD): The fund is up 15.5% YTD, and MRK stock’s weighting is 6.06%

3. Bear Put Spread/h2

Readers who believe there could be near-term profit-taking in MRK stock in the short run might consider initiating a bear put spread strategy. As it involves options, this set-up will not be appropriate for all investors.

It might also be appropriate for long-term Merck investors to use this strategy in conjunction with their long stock position. The set-up would offer some short-term protection against a potential decline in price in the coming weeks.

This trade requires one long MRK put with a higher strike price and one short Merck put with a lower strike price. Both puts will have the same expiration date.

Such a bear put spread would be established for a net debit (or net cost). It will profit if Merck shares decline in price.

For instance, the trader might buy an out-of-the-money (OTM) put option, like the MRK 21 January 2022 85-strike put option. This option is currently offered at $2.76. Thus, it would cost the trader $276 to own this put option, which expires in over two and a half months.

At the same time, the trader would sell another put option with a lower strike, like the MRK 21 January 2022 80-strike put option. This option is currently offered at $1.22. Thus, the trader would receive $122 to sell this put option, which also expires at the same time as the long option.

The maximum risk of this trade would be equal to the cost of the put spread (plus commissions). In our example, the maximum loss would be ($2.76 - $1.22) X 100 = $154.00 (plus commissions).

This maximum loss of $154 could easily be realized if the position were held to expiry and both MRK puts expire worthless. Both puts will expire worthless if the Merck share price at expiration is above the strike price of the long put (higher strike), which is $85 at this point.

This trade’s potential profit is limited to the difference between the strike prices, i.e., ($85.00 - $80.00) X 100) minus the net cost of the spread (i.e., $154.00) plus commissions.

In our example, the difference between the strike prices is $5.00. Therefore, the profit potential is $500 - $154 = $346.

This trade would break even at $83.46 on the day of the expiry (excluding brokerage commissions).