Eli Lilly’s Obesity Drug Has Big Potential. One Way to Play the Stock.

The world is politically and economically combustible, but most people probably agree on this: You can never be too thin, or too rich.

Almost everyone, everywhere, would like to lose 10 pounds and make more money. That health and wealth statement seems glib at a time when the world is dangerously chaotic, but it has an enduring quality that withstands even the current fears about the world. Our early September observation that the world was experiencing a rare “plastic moment” in human affairs has unfortunately proven true.

Since then, stocks have plunged and the Cboe Volatility Index or VIX, has surged as fears abound that the Middle East’s problems could trigger World War III.

If that happens, and the world order that was established after WWII breaks, chaos will likely envelope the markets. But, even then, people will likely still agree that you can never be too rich or too thin. The caveat to all that, of course, is that widespread famine or a nuclear disaster does not emerge from the current conflicts.

Anyone who agrees with the rich-thin thesis can try monetizing the idea by selling cash-secured puts on Eli Lilly (ticker: LLY).

The pharmaceutical company’s Mounjaro diabetes drug is expected to soon be approved to treat obesity. Some analysts are so excited about the prospects that they are sharply raising Eli Lilly’s stock price targets in anticipation of extraordinary earnings growth.

With Eli Lilly’s stock at $592.33, investors could sell the November $560 put for about $10.50. If the stock is above the strike price at expiration, investors can keep the put premium.

If the stock price falls below the strike price, investors must buy the stock at an effective price of $549.50 (strike less premium) or adjust the put position to avoid assignment.

Eli Lilly’s stock is trading in an interesting technical pattern. Shares have curled lower after an historic rally, and appear to be poised to test technical support. The stock has done this a few times in the past, and each time investors have taken advantage of the weakness.

The key difference between now and then is that the macro-market picture is dramatically different. So, anyone who considers the Eli Lilly trade is ultimately expressing a view that the obesity drug thesis is so robust that it can withstand whatever struggles emerge in the broad market.

Eli Lilly has stock specific risks, of course. Shares are up some 62% this year, sharply outperforming the stock market. The stock is trading at an extreme earnings multiple, which will be tested when Eli Lilly reports third-quarter earnings on Nov. 2. The company’s earnings report, and especially any comments about what investors can expect in the future, will undoubtedly test investor enthusiasm for obesity drugs.

During the past 52 weeks, Eli Lilly’s stock has ranged from $309.20 to $629.97.

Despite the stock-specific risks, the Eli Lilly cash-secured put trade is a reasonable wager for investors who are having a hard time sitting still as the world convulses.

We continue to believe, as averred in recent weeks, that there is great merit in watching global affairs from the safety of high-yielding bonds without increasing equity risk. But we know that many investors are struggling to be patient, just as many people struggle to exercise and eat well in a culture that favors easy solutions and constant motion.

It is perhaps better to exercise, eat well, and drink less alcohol, but many doctors complain that patients often prefer to pop pills or get shots rather than do the hard work. Pharmaceutical treatments for obesity is thus potentially huge.

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Originally Posted October 25, 2023 – Eli Lilly’s Obesity Drug Has Big Potential. One Way to Play the Stock.