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A high probability options trade and a closer look at a long opportunity in Merck & Co.
- Strats Team
- Jul 12
- 4 min read
Date: July 12, 2025
Asset: Merck & Co., Inc. ($MRK)
Current Price: $83.36
Recommendation: Bullish
Strategy: Long Call Option (Jan 2026 Expiry) + Short ATM Credit Spreads (45 DTE)
Investment Horizon: Short-term (15 to 30 days) Exit duration: Hypothetical; may close on demand for profit.
Summary
Merck & Co. (MRK) presents a strong bullish options trade idea, supported by solid fundamentals, a technical analysis, and positive market sentiment. Keytruda, the company's flagship drug, contributed nearly 46% of 2024 revenue at around $29.5 billion, and is complemented by a diverse lineup in oncology, vaccines, and animal health, positioning MRK for sustained growth.
Analyst upgrades, a 3.7% dividend yield, and a forward P/E of 9.02 suggest the stock is undervalued compared to a $103.25 target, offering over 27% upside. Restructuring aims to save $750 million annually, improving free cash flow with a net debt-to-EBITDA of 0.9x.
There are upcoming earnings in the final weeks of July, and therefore, we may expect the stock to rise to a considerable level to the upside.
We are considering two trade proposals to exploit this market opportunity:
Buying a January 2026 call option with 40-50 delta
Selling at-the-money credit spreads with 45 days to expiration to collect premiums through theta decay.
This strategy uses short-term profits to finance long-term positions, while monitoring volatility to identify undervalued calls and overvalued spreads.
We show payoff profiles, loss limits, and risk assessments to clarify the setup.
NOTE: Trades shown here are hypothetical and may be different from the actual trade alert that will be sent after the market opens tomorrow. Please consider this brief to get an idea of the trade perspective at a scale for large accounts. The trades taken should be well under Max Risk, which is 2% of the account equity. Therefore, considering either trade is sufficient, with Trade 2 (diff. strikes in the alert) being the better option for small accounts.
Fundamental Rationale
MRK's 2024 revenues reach about $64 billion, led by Keytruda's $29.5B and Gardasil's $8.6B, with over 20 pipeline assets aiming for blockbuster success. Low leverage, strong cash flow, and reliable dividends make it a defensive power, while restructuring improves margins for R&D. Analysts rate it a 'Moderate Buy,' with nine buys, seven holds, one sell, and a $103.25 target, offering 27.58% upside, as UBS and TipRanks note. MRK's stability may benefit from easing trade barriers like tariffs.
Technical Rationale
As of writing this brief, MRK, currently trading at $83.36, is poised for a surge, on a triangular pattern on the weekly chart that's nearing a breakout, with the descending trendline and support converging for potential upward momentum. As illustrated in the chart below, the bottom support zone aligns with key levels on the monthly chart (at 200 day moving average) and the volume point of control (POC), providing a solid foundation against further declines.
A clear bullish divergence appears between the price making lower lows and the MACD forming higher lows, signaling weakening downside pressure, while the RSI is flashing a buy signal from oversold territory, indicating building momentum without overbought concerns. Resistance levels stand at $92.63 to $93.26, followed by $97.36 to $98.25, offering clear targets for upside moves.
We expect to exit the position in profits when MRK surges towards the resistance.
Although overall market sentiment may turn bearish in August and could last until October, making it a headwind for this bullish perspective.
As always, we exit on demand in profits as markets are dynamic and change in real time. Today's scenario may or may not be applicable, potentially causing a delay to our current trade perspective.
There is a risk of securities litigation that could induce short-term swings, market-wide pullbacks impacting defensives, and delays in Phase 3 trials for oncology or cardiovascular candidates.
Trade 1: Long Call Option (Jan 2026 Expiry)
A call option on MRK expiring January 15, 2026, at the $85 strike for a delta around 40-50 (near ATM at the current $83.36 price, with delta approximately 0.48 based on volatility scans showing undervalued long-dated options). The premium stands at roughly $6.70 per contract, per current bid-ask data. So, for 10 contracts (1,000 shares), the total outlay is $6,700. Breakeven sits at $91.70 ($85 strike plus $6.70 premium), with maximum loss capped at the $6,700 premium and unlimited gains above that. As MRK's stock price rises, the payoff escalates rapidly due to the call option going deep in the money. This is a defined risk strategy, meaning the max loss is defined and limited to the premium paid to open the positions. We, however, would like to finance the cost incurred here, in Trade 2, by selling the put credit spreads below.
Payoff Profile
Assuming we hold this option through its expiration in January 2026, which we typically don't, the risk here is the premium paid (e.g., 10 contracts) of $6,700, which is lost if MRK ends below $85, accelerated by theta decay in stagnant conditions or IV drops. A potential stop loss would be to exit on a breach of $74 support level.
Trade 2: Short ATM Credit Spreads (45 DTE)
Execute a bull put credit spread by selling the $85 put and buying the $80 put, with a wing width of $5 (although we keep it tight in a trade alert being sent next week), expiring around August 26, 2025 (close to 45 DTE), after scanning the implied volatiltiy (IV) for overvalued short-term options. The net credit is approximately $1.75, estimated from typical spreads under the current IV. For 10 contracts, this collects $1,750. The $5 spread width limits max loss to $3,250 ($5 minus $1.75 times 1,000 shares). Max gain is the $1,750 credit if above $85, with breakeven at $83.25 ($85 minus $1.75) and ~70% profit probability per delta. Payoff yields the full credit above $85, tapering to max loss below $80.
The $3,250 max loss hits below $74, possibly from sharp drops or earnings news; gamma spikes near expiry. The same exit strategy applies here, similar to Trade 1, by squaring off the position if the stock falls below the support zone shown in yellow (chart above).
Monitoring
Initiate both trades together, blending theta income with delta exposure. Track daily or set a price alert against $74 support, $93 resistance, and for any news events. Exit call below $74 or at $93; spread at 80% gain or book loss or roll on demand as per the adjustments sent on Slack.
Disclaimer: This trading brief is for informational purposes only and does not constitute financial advice. Options trading involves significant risks, including the potential loss of the entire investment. Investors should consult a financial advisor and conduct their due diligence before executing any trades.
Notes on Assumptions: Premiums based on estimates; actuals vary after the market opens with different IV and spreads. Charts exclude fees.
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