A Merger Creates a Trading Opportunity
Some companies capture headlines when they announce a deal. Others quietly complete deals to further business interests. A recent example of the latter, a smaller deal than a headline grabbing acquisition, could provide traders with an opportunity to obtain a gain of 85%.
A Healthcare Deal
BioTelemetry, Inc. is a leading remote and wireless medical technology company focused on the delivery of health information to improve quality of life and reduce cost of care. Geneva Healthcare is a leading provider of remote monitoring for implantable cardiac devices.
An early stage company, Geneva has developed a proprietary cloud-based platform that aggregates data from the leading device manufacturer systems, enabling the company to remotely monitor all of a physician’s patients with implantable cardiac devices such as pacemakers, defibrillators and loop recorders.
Geneva’s platform provides physicians a single portal to order patient monitoring, view monitoring results and request routine device checks, helping drive significant in-office efficiencies and patient compliance while allowing physicians to focus on patient care.
Joseph H. Capper, President and Chief Executive Officer of BioTelemetry, commented:
“We are extremely excited about the combination of these two market-leading, technology-enabled service providers.
Just as we revolutionized remote cardiac outpatient monitoring, with our MCOT service and platform, Geneva is transforming the way physician offices consolidate and manage the monitoring of implantable cardiac devices.
We believe the enhanced offering this merger creates will provide tremendous benefit to the thousands of clients we serve and will further solidify our leadership position in remote cardiac monitoring.”
Yuri Sudhakar, Chief Executive Officer of Geneva added, “We are excited to join forces with a company that has established sustained success as a healthcare service provider in the same market that we serve.
Cardiology providers are looking for strategic solutions to improve patient care and workflow. We provide these solutions by leveraging technology to deliver better patient care and a better patient experience.
We think this powerful combination of complimentary tech-enabled services provides Geneva the necessary resources to significantly expand our reach in the over $1.0 billion domestic implantable cardiac device monitoring market, delivering the much-needed benefits of our technology and service to cardiac practices, physicians and patients.”
In 2018, their first full year of commercialization, Geneva generated approximately $6 million of revenue and reached profitability by year end.
This deal could be the catalyst to push BEAT above resistance.
The longer-term chart shows the resistance developed after an extended up move and the deal sets up another potentially large move.
A Trade for Short Term Bulls
As with the ownership of any stock, buying BEAT 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.
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 BEAT
Every day, we scan the markets looking for trades that carry 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 BEAT, the May 17 options allow a trader to gain exposure to the stock.
A May 17 $80 call option can be bought for about $6.65 and the May 17 $85 call could be sold for about $4.90. This trade would cost $1.75 to open, or $175 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 $175.
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 BEAT the maximum gain is $3.25 ($85 – $80 = $5; $5 – $1.75 = $3.25). This represents $325 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $175 to open this trade.
That is a potential gain of about 85% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.