In a world where there are no coincidences, there is something prophetic about a late-breaking news story on an otherwise sleepy Friday afternoon – with the following trading day being Halloween – that shakes both the stock market and the presidential election. And yet, as unlikely as any of these events might have been in the past, here we are with the absurdity volume turned all the way up to 11 in a market that has been most unpredictable, leaving only one prudent choice for investors over the short term: portfolio safety.

I have three strategic safety-first plays in the following paragraphs. But first, let’s set the stage.

Learning from the McKesson Option Windfall

Over the last few weeks I have expressed my concerns about the near term prospects for the healthcare sector. As a result, I have positioned our portfolio in a way that its value could be preserved in case of negative surprises.  Aside from owning shares in the ProShares Ultrashort Biotech ETF (BIS), I have recommended the purchase of several put options on key portfolio components. That caution paid off handsomely on Friday, October 28th, as Amgen (NSDQ: AMGN) and McKesson (NYSE: MCK) reported extremely negative earnings and gave even worse guidance for the future. Both stocks fell hard and our pessimistic strategy delivered: Our November 18, 2016 Put Option (MCK_111816P170), delivered a stunning range of potential profit from 525% (based on opening price of $29.70 on 10/28/16) to as much as 865% (based on the high price for the day of $45.24). And while we should rejoice from our good trading fortune, it is important to analyze what the McKesson stock crash (-23% on the day) could mean for the entire healthcare sector. 

Strictly speaking, healthcare is a tightly connected ecosystem where a sneeze in one of the many interconnected areas could mean pneumonia for others. That said, MCK is a key cog in the chain, since it is the world’s largest medical supply wholesaler. It sells products to hospitals, drug and grocery stores, and private offices. It franchises pharmacy services. Despite all that, it missed expectations badly because of “softer pricing” in the U.S. So if McKesson is the sneeze, it follows that Amgen’s miss on the same day may be the start of an acceleration of the pneumonia for the whole sector.

This is why I am very worried about the healthcare industry and expect more downside problems for many more companies in the sector:

1) Insurance companies won’t pay pharmaceutical and medical equipment companies high drug prices anymore;

2) Thus, the high profit gravy train in the U.S. health care is drying up; and,

3) Wall Street is clueless about this and is setting investors up for major disappointments by having earnings estimates that in many cases are likely to be too high. Worse they will start playing catch-up to reality and downgrade companies widely. 

What’s the major consequence of these three factors? The recent declines in Amgen and McKesson are not likely to be the last. 

Who’s the next Big Surprise?

The next major earnings report with the potential for a big move in response to a surprise is Gilead Sciences (NSDQ: GILD), a leading anti-viral producing biotech company with major successes in recent years with blockbuster drugs such as Sovaldi and Harvoni. These two drugs have made Hepatitis C, which was a certain death sentence before their arrival, into an inconvenience on the way to a 90-plus percent chance of a cure. The problem for Gilead is that the retail price for Sovaldi and Harvoni is listed at $1000 and $1125 per pill. A full course of treatment is $84,000 and $94,500 respectively. In the current climate, seeing the formulary limitations placed on patients by insurance companies in my practice on a daily basis, and factoring in the Amgen and McKesson earnings, I would expect that sales of Harvoni and Sovaldi have likely slowed significantly, perhaps more than Wall Street expects, and that the odds of the company delivering a miss on earnings expectations are well above average. 

The Gilead earnings report is due for release after tomorrow’s (November 1^st) close, giving us time to set up an appropriate strategy. Expectations are for $3.08 per share on revenue of $7.45 billion for the quarter. Therefore, I have designed a straddle trade based on the December 16 2016 (third week) $72.50 strike price.  The trade is designed on expectations of the put leg rising in a big way on substantial earnings miss. If the company delivers a nice upside surprise we should be able to have a profitable trade based on the call side. 

Buy to open Gilead December 2016 $72.50 Call Option (GILD_121616C72.5) up to $5.

Buy to open Gilead December 2016 $72.50 Put Option (GILD_121616C72.5) up to $4.

Hedge Bets on Anthem

I recommended the Anthem December 16, 120 Strike Price Put (ATNM121616P120) on August 29^th, 2016 on expectations that losses on the Affordable Care Act would lower the price of the stock. With earnings upcoming on November 2^nd – and given the market’s volatility of late – plus better than expected earnings recently announced by United Healthcare, I am recommending the purchase of Anthem December 16, 120 Strike Call option (ATNM121616C120) as a precaution, just in case Anthem delivers an unlikely upside surprise. Average estimates for the quarter are revenues of $20.77 Billion and earnings of $2.47 per share.

Buy to open Anthem December 2016 $120 Call Option (ANTM_121616P120) up to $6

Anthem December 16, 120 Strike Price Put (ATNM121616P120) Buy up to $6.  Bought on 8/29/16 at $5.15. 10/28/16 closing price $4.03.  Dr. Duarte has a position in this options contract.

Election Protection Straddle

I am increasingly concerned about the markets as the election nears. Simply put, there are too many things that can go wrong over the next ten days. I see two problems in this market; the potential for big earnings misses, and the newly reopened case against Mrs. Clinton over her e-mail problems. It’s clear that Wall Street is rooting for Mrs. Clinton but this investigation is a big red flag, no matter what happens. As a result, and as a temporary protective measure, I am recommending a straddle option strategy on the entire S&P 500 Index (SPY) which will protect our portfolio if there is a major move, either up or down in this market.

Buy to Open SPY December 16, 2016 210 Call Option up to $7.

Buy to Open SPY December 16, 2016 210 Put Option up to $5.

Portfolio Summary

Changes this week:

New Positions/Updates

Buy to open Gilead December 2016 $72.50 Call Option (GILD_121616C72.5) up to $5

Buy to open Gilead December 2016 $72.50 Put Option (GILD_121616C72.5) up to $4

Buy to open Anthem December 2016 $120 Call Option (ANTM_121616P120) up to $6

Buy to Open SPY December 16, 2016 210 Call Option up to $7

Buy to Open SPY December 16, 2016 210 Put Option up to $5

Special Situation Trade: Buy ProShares Ultrashort ETF (NYSE Arca: BIS) from $33-$36 with a trailing 8% Sell Stop. Bought 8/25/16 at $33.44. 10/28/16 closing price $38.28. Raise Sell Stop to $34.

SOLD – McKesson November 18, 2016 160 Put (MCK_111816P160). Bought 9/19/16 at $4.70.  10/28/16 Sold $29.70-$45.24.  Trade profit: 550% – 865%.

Closed Out Positions

SOLD – Medidata Solutions (MDSO) –  Bought on 3/7/16 at $36. Sold on 10/28/16 at $48. Return +33.33%.

SOLD – Meridian Biosciences (VIVO) –  Bought on 6/29/15 at $16.40. Sold on 10/24/16 at $16.00. Return (-) 3.51%*
*Return does not include the $0.80 cents in dividends received during the period, a yield 0f 4.87% based on the purchase price.

SOLD – McKesson Inc. (MCK) – Bought on 5/26/16 at $180. Sold on 10/28/16 at $129.80. Return (-) 27.8%.

Option Roll Closed:

Part 1) Amgen October 21, 2016 175 Call Option (AMGN_121616C170). Bought on 9/23/16 at $3.25. Rolled on 10/2/16 at 0.50.

Part 2) Amgen December $170 Call (AMGN_121616C170). Bought on 10/03/16 at $4.53. Stopped out at $3 on 10/17/16. Total loss of trade (-56%).