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A Joint Venture Could Boost Traders With a Possible Gain of 238%

A Joint Venture Could Boost Traders With a Possible Gain of 238%

The news is, once again, seemingly mundane although the trading opportunity is far from typical and could lead to a triple digit gain. PR Newswire reported,

“Encompass Health Corp. (NYSE: EHC) and San Angelo, Texas-based Shannon Health [recently] announced plans to form a joint venture for a new, 40-bed, freestanding inpatient rehabilitation hospital in San Angelo, Texas.

The hospital is being constructed by the Shannon West Texas Memorial Hospital Trust, the foundation arm of Shannon Health, and will be leased to the joint venture between Encompass Health and Shannon Health. This hospital will replace Shannon Medical Center’s 14-bed rehabilitation unit, which has been providing rehabilitative care to patients since 1988.

“We are excited to be working with the team at Shannon Health to meet the growing need for rehabilitation services in the San Angelo community,” said Frank Brown, president of Encompass Health’s southwest region. “Under our joint venture, we’ll continue providing the excellent rehabilitative care established by Shannon in a new space specifically designed for rehabilitation patients.”

Included in the hospital will be a spacious therapy gym, advanced rehabilitation technologies, an activities of daily living suite, cafeteria and dining room, pharmacy and courtyard.

It will be located on approximately 7.7 acres along the north side of the Appaloosa Trail west of the intersection with Farm-to-Market Road 2288 in San Angelo. The joint venture plans to start providing patient care in the new hospital beginning spring 2021.

“We have great pride at Shannon in providing high quality inpatient rehabilitation services for our patients and their families for more than 30 years,” said Shane Plymell, CEO and President of Shannon.

“As our region continues to see tremendous growth, the healthcare needs of our population will continue to evolve. Encompass Health is a respected leader in this industry, and we are excited to partner with their expertise and expand our capability to serve the needs of more patients here in the Concho Valley.

Our continuing mission is to provide patients an exceptional experience along with the best possible care.”

Complementing local acute care services, the hospital will care for patients recovering from a variety of debilitating illnesses and injuries including strokes and other neurological disorders, brain injuries, spinal cord injuries, amputations and complex orthopedic conditions. It offers physical, occupational and speech therapies as well as 24-hour nursing care that aim to restore functional ability and quality of life.

The stock did move higher as the news reached traders.

EHC daily chart

The longer-term chart shows a move towards $80 would be expected from a technical perspective.

EHC weekly chart

A Trade for Short Term Bulls

As with the ownership of any stock, buying EHC could require a significant amount of capital and exposes the investor to standard risks of owning a stock.

To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.

Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.

To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.

This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.

bull call spread

Source: The Options Industry Council

Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.

This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.

A Specific Trade for EHC

Every day, we scan the markets looking for trades with low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.

When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.

For EHC, the April 21 options allow a trader to gain exposure to the stock.

An April 21 $75 call option can be bought for about $2.84 and the April 21 $80 call could be sold for about $1.70. This trade would cost $1.14 to open, or $114 since each contract covers 100 shares of stock.

The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.

In this trade, the maximum loss would be equal to the amount spent to open the trade, or $114.

The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.

For this trade in EHC the maximum gain is $3.86 ($80 – $75= $5; $5 – $1.14 = $3.86). This represents $386 per contract since each contract covers 100 shares.

Most brokers will require minimum trading capital equal to the risk on the trade, or $114 to open this trade.

That is a potential gain of about 238% in EHC based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.