Stock Option Traders Smell Blood in the Water After Eli Lilly's (LLY) Q2 Fumble

Business Insider

15 hours ago

One of the harsh realities of the equities arena is that it's open and entropic. In other words, exogenous factors could come in and disrupt the paradigm — seemingly without warning. That was pretty much the case with pharmaceutical giant Eli Lilly & Co. (LLY) earlier this month. Despite strong results for the second quarter, LLY stock tumbled badly after the disclosure.
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At first glance, the red ink would appear to be an overreaction, perhaps a sick joke. Earnings per share landed at $6.31, well above Wall Street analysts' consensus view of $6.07. In the year-ago quarter, the pharma posted EPS of $3.92. On the top line, Eli Lilly generated $15.56 billion, up 5.83% over the consensus estimate of $15.42 billion. One year ago, the company reported revenue of $11.3 billion.
According to David Ricks, Eli Lilly Chairman and CEO, 'Lilly delivered another quarter of strong performance, achieving 38% year-over-year revenue growth driven by robust sales of Zepbound and Mounjaro and sustained momentum across our key medicines.'
So, what was the problem? The pharma released clinical trial data for weight-loss pill orforglipron, which met its primary endpoint but with results that didn't quite match expectations. Still, from a fundamental perspective, it's hard to argue against LLY stock. With management raising its 2025 guidance, the enterprise appears to be brimming with confidence.
However, for stock options traders, a currently active quantitative signal suggests a bullish upturn in LLY stock is just around the corner.
Applying the Proper Epistemological Framework for LLY Stock
While participating in the derivatives market opens the door to leveraged positions, it comes with a vast set of risks. In many cases, options represent all-or-nothing wagers: either the strategy will be in the money or it will not. Further, the probabilistic window is tightened because eventually, all options expire. Therefore, you can't ride out volatility indefinitely like you can with open-market transactions.
Given the unique risk profiles associated with options trading, it's vital to maintain statistical continuity between input and output variables in your stock forecasting model. In traditional financial analyses — whether the fundamental or technical approach — this continuity is broken. Commonly studied metrics (such as earnings or share price) are continuous scalar signals, meaning that they're unbounded. However, from these signals, analysts extract discrete meaning, such as 'good price' or 'bad earnings.'
Essentially, many market analysts are unintentionally committing a category error, using one domain of reality to predict outcomes in an entirely different domain. To avoid this statistical flaw, I propose instead to maintain framework consistency by recognizing the only objective truth in the equities sector: at the end of any trading session, the market is either a net buyer or a net seller.
Put simply, I'm no longer concerned with the ordinary ebb and flow. What I want instead is to uncover the market's voting record—operating on the premise that the aggregate of buying and selling decisions carries predictive value for where the target security may move next.
Mathematically, my forecasting model is descriptive: I take what has conditionally happened in the past and project what could happen in the future. This approach is conceptually different from the standard approach of options trading, which involves derivations from the Black-Scholes formula to estimate where the stock in question may end up. This is a prescriptive approach because it focuses on where a stock should trade.
However, I firmly believe that descriptive path dependency is superior because the estimates stem from actual behavioral geometry — not advanced math that is aesthetically pleasing but functionally useless.
Converting Theory Into Application
In the equities arena, converting continuous scalar signals into discrete objects is easy: just compress the price action into net accumulative or distributive sessions. In the case of LLY stock, in the past 10 weeks, the market voted to buy LLY six times and sell four times. During this period, the security incurred a downward trajectory. For brevity, we can label this sequence as 6-4-D.
It's an odd pattern as the balance of accumulative sessions outweighs distributive, yet the trajectory is negative. Historically, though, the sequence has resulted in a sentiment reversal more often than not. In fact, in 68.42% of cases (going back to January 2019), the price action of LLY stock rises, with a median return of 2.47%.
What makes Eli Lilly compelling for bullish options traders is that, as a baseline, the chance that a long position in LLY stock will rise on any given week is 60.12%. Essentially, this is the null hypothesis or the probabilistic performance expectation assuming no mispricing. Any options strategy must be able to beat the null on paper; otherwise, there's no point.
Clearly, with a 68.42% probabilistic edge, the 6-4-D sequence offers an incentive for bullish speculators to take a risk. Moreover, based on past analogs, there's a solid possibility that LLY stock could exceed the $750 level by the September 19th expiration date.
With that said, I'm tempted by the 720/730 bull call spread expiring September 19th. This transaction involves buying the $720 call and simultaneously selling the $730 call, for a net debit paid of $400 (the maximum possible loss). Should LLY stock rise through the short strike price of $730 at expiration, the maximum profit is $600, a payout of 150%.
Is Eli Lilly a Buy, Sell, or Hold?
Turning to Wall Street, LLY stock carries a Strong Buy consensus rating based on 17 Buys, five Holds, and zero Sell ratings over the past three months. LLY's average stock price target is $924.42, implying ~32% upside potential over the coming year.
LLY Can Turn the Ship Around
While the recent volatility in LLY stock hasn't been helpful for longtime stakeholders, the red ink opens the door for new speculators to enjoy a potential discount. Based on a statistical analysis of prior like-to-like conditions, LLY is potentially on course to hit $750 over the next five weeks. Right now, there's a compelling bull call spread that offers a huge payout at the $730 mark — making it a deal well worth considering.