JPMorgan: Sell Baxter options as stock to be 'range-bound'

Investors should sell Baxter International Inc. options because swings in the company's stock may be limited until the U.S. health-care overhaul's effect becomes clear, JPMorgan Chase & Co. said.

Equity derivatives strategists Amyn Bharwani and Marko Kolanovic recommended selling the August $45 puts and the August $50 calls, a strategy known as a "strangle," which profits from a drop in the stock's volatility. Baxter, which makes vaccines and blood products, gained 0.6 percent to $47.50 yesterday.

"We expect uncertainty about the health of the plasma market and its implications for Baxter's 2011 earnings power to persist into year-end," the New York-based strategists wrote in a report yesterday citing JPMorgan health-care industry analyst Michael Weinstein. "Absent better visibility, we see Baxter shares as range-bound at or near current levels."

Baxter plunged the most in seven years on April 22, tumbling 13 percent to $51.13, after the Deerfield-based company cut its 2010 earnings forecast on costs from the health-care overhaul. The stock has extended losses since then and is down 19 percent this year.

Weinstein cut his rating on the stock to "neutral" from "overweight" on April 26, citing his expectation for the shares to be range-bound. He also lowered his share-price forecast to $55 from $60.

"The underlying issue is the lack of visibility on 2011, an absence of catalysts, and the likelihood that we won't have visibility until December at the earliest or more likely" the first quarter of next year, the analyst wrote last week.

Weinstein had kept his "overweight" rating since Jan. 3, 2006. The shares gained 24 percent during that period as health stocks in the Standard & Poor's 500 Index lost 3.4 percent.

Selling a strangle is bet that volatility will decrease. It involves selling a put with a strike price below the current stock price and buying a call with the same expiration date and a strike above the stock price. The trade profits if the shares don't move far enough past either strike, allowing the seller to keep the premium paid by the buyers of the contracts.

Baxter said April 22 that 2010 earnings will be reduced by an increase in Medicaid rebates and a change in the taxes for retiree prescription-drug benefits required under the health- care law enacted in March. The company also forecast lower use of plasma products than previously expected.

Drug companies such as Abbott Laboratories, Eli Lilly & Co., Johnson & Johnson and Gilead Sciences Inc. have also said the health-overhaul law is expected to cut profit in 2010.