Merck Stock In Bullish Setup Ahead Of Q3 Results; Apple Leads FAANG Earnings Barrage

Drugmaker Merck (MRK) headlines a very busy week of earnings reports, along with high-profile technology stocks like Google-parent Alphabet (GOOGL), Meta Platforms (META), Amazon.com (AMZN) and Apple (AAPL). Merck stock has been basing nicely ahead of its Q3 earnings report.

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Merck has an Accumulation/Distribution Rating of “A-” as it sits near the top of a 17-week flat base.

Two Leaderboard stocks are also on the earnings docket: Vertex Pharmaceuticals (VRTX) and Texas Roadhouse (TXRH). Both report Thursday after the close.

Q3 earnings reports so far have been pretty good despite trepidation about soft profit outlooks.

Financial stocks kicked things off last week, reporting higher net interest margin and optimistic outlooks. However, big banks also boosted their loan-loss reserves in anticipation of an economic slowdown and the possibility of increased loan defaults.

Airline stocks Delta Air Lines (DAL), United Airlines (UAL) and American Airlines (AAL) have posted strong results and bullish Q4 guidance as well, defying slowdown forecasts.

Meanwhile, Netflix (NFLX) and Intuitive Surgical (ISRG) recently turned heads in the technology sector with solid Q3 results.

Merck Stock Holds Near Highs

The stock market might still be in a correction, but you’d hardly know it when looking at Merck’s chart. The stock is just below a 95.82 entry, after a bullish rally off the 200-day moving average.

The Dow Jones drug giant reported strong second-quarter results in July when adjusted profit jumped 43% to $1.87 per share. Revenue increased 28% to $14.6 billion, underpinned by sales of its oral Covid pill Lagevrio, along with strong cancer drug demand.

Flagship drug Keytruda contributed $5.25 billion in sales, up 26%. Merck’s human papillomavirus vaccine Gardasil posted the strongest growth, as sales climbed 36% to $1.67 billion. On the flip side, revenue from diabetes treatment Januvia slipped 2% to $1.23 billion.

Merck raised its full-year revenue guidance to between $57.5 billion  and $58.5 billion, compared to prior guidance of $56.9 billion to $58.1 billion.

For the most recent quarter, the Zack’s consensus estimate is for $1.68 per share, down 4% from the year-ago quarter. Revenue is expected to rise 8% to $14.19 billion. Results are due Thursday before the open.

Apple Results On Deck

Growth concerns have weighed down Apple, along with the other FAANG stocks set to report. But AAPL stock made a pretty good case for a bottom when it reversed sharply higher on Oct. 13 with the broad market. But like many other stocks, the tech icon has overhead supply issues as it tries to work its way higher.

Apple stock gapped up in late July after reporting an 8% decline in profits, to $1.20 per share, while revenue rose 2% to $83 billion. iPhone revenue totaled $40.67 billion, about $2 billion above expectations but up just 3% year over year.

Earlier this week, The Information reported that Apple is slashing iPhone 14 Plus production while it reassesses demand.

For the current quarter, it’s expected to report adjusted profit of $1.24 per share, up 2%. Revenue is forecast to rise 6% to $88.43 billion.

Apple reports Thursday after the close, along with other top stocks like Deckers Outdoor (DECK), First Solar (FSLR) and LPL Financial (LPLA).

LPLA stock has been an outstanding performer in the financial sector while most other stocks have languished. The provider of brokerage and investment advisory services recently found support at its 10-week moving average after breaking out of a consolidation pattern in early August.

Options Trading Strategy

A basic options trading strategy around earnings — using call options — allows you to buy a stock at a predetermined price without taking a lot of risk. Here’s how the options trading strategy works.

First, identify top-rated stocks with a bullish chart. Some might be setting up in sound early-stage bases. Others might have already broken out and are getting support at their 10-week lines for the first time. And a few might be trading tightly near highs and refusing to give up much ground.

Weak market notwithstanding, Merck stock could be a candidate for a call-option trade. Avoid extended stocks that are too far past proper entry points.

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In options trading, a call option is a bullish bet on a stock. Put options are bearish bets. One call option contract gives the holder the right to buy 100 shares of a stock at a specified price, known as the strike price.

Put options are for weak performers with bearish charts. The only difference is that an out-of-the-money strike price is just below the underlying stock price. A put option gives the holder the right to sell 100 shares of a stock at a specified price.

You earn profits when the stock falls below the strike price with a put option.

Check Strike Prices

Once you’ve identified an earnings setup for a call option, check strike prices with your online trading platform, or at cboe.com. Make sure the option is liquid, with a relatively tight spread between the bid and ask.

Look for a strike price just above the underlying stock price (out of the money) and check the premium. Ideally, the premium should not exceed 4% of the underlying stock price at the time. In some cases, an in-the-money strike price is OK as long as the premium isn’t too expensive.

Choose an expiration date that fits your risk objective but keep in mind that time is money in the options market. Near-term expiration dates will have cheaper premiums than those further out. Buying time in the options market comes at a higher cost.

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This options trading strategy lets you capitalize on a bullish earnings report without taking too much risk. Risk is equal to the cost of the option. If the stock gaps down on earnings, the most you can lose is the amount paid for the contract.

Merck Stock Option Trade

Here’s what a recent call option trade looked like for Merck.

When Merck stock traded around 92.95, a slightly out-of-the-money weekly call option with a 93 strike price (Nov. 11 expiration) came with a premium of around $2.65, or nearly 2.9% of the underlying stock price at the time.

One contract gave the holder the right to buy 100 shares of MRK stock at $93 per share. The most that could be lost was $265 — the amount paid for the 100-share contract.

When taking the premium paid into account, Merck would have to rally past 95.65 for the trade to start making money (93 strike price plus $2.65 premium per contract).

Follow Ken Shreve on Twitter @IBD_KShreve for more stock market analysis and insight

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