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A Possible 122% Gain in a Health Care Stock

A Possible 122% Gain in a Health Care Stock

As earnings continue to come in, trading opportunities continue to develop. PR Newswire reported that eHealth, Inc. (Nasdaq: EHTH), a leading private online health insurance exchange, announced its financial results for the second quarter ended June 30, 2019. Traders seemed bullish on the news.

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  • EHTH daily chart

    Revenue for the second quarter of 2019 was $65.8 million, a 101% increase compared to $32.7 million for the second quarter of 2018.

    GAAP net loss for the second quarter of 2019 was $5.8 million compared to net loss of $12.0 million for the second quarter of 2018.

    Adjusted EBITDA was $0.8 million for the second quarter of 2019 compared to $(10.1) million for the second quarter of 2018.

    Net cash used in operating activities for the second quarter of 2019 was $11.5 million compared to $0.3 million for the second quarter of 2018.

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  • Scott Flanders, chief executive officer of eHealth stated, “We delivered another strong quarter once again exceeding our expectations and building momentum in our Medicare business that has continued to scale rapidly accompanied by EBITDA margin expansion.

    Approved Medicare members grew 78% year-over-year, driving a 105% increase in Medicare revenue year-over-year and a significant increase in Medicare segment profit.

    Based on our performance to-date, access to expanded telesales capacity and continued progress in gaining greater effectiveness across our operations, we are increasing our 2019 revenue and Adjusted EBITDA guidance for the second time this year.”

    GAAP revenue for the second quarter of 2019 totaled $65.8 million, a 101% increase compared to $32.7 million for the second quarter of 2018. Commission revenue for the second quarter of 2019 totaled $60.6 million, a 98% increase compared to $30.6 million for the second quarter of 2018.

    Other revenue for the second quarter of 2019 was $5.2 million, a 157% increase compared to $2.0 million for the second quarter of 2018.

    Revenue from our Medicare segment was $52.3 million for the second quarter of 2019, a 105% increase compared to $25.5 million for the second quarter of 2018.

    Revenue from our Individual, Family and Small Business segment was $13.5 million for the second quarter of 2019, an 88% increase compared to $7.2 million for the second quarter of 2018.”

    The news pushed the stock out of a trading range.

    EHTH weekly chart

    A Trade for Short Term Bulls

    As with the ownership of any stock, buying EHTH 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 EHTH

    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 EHTH, the August 16 options allow a trader to gain exposure to the stock.

    An August 16 $110 call option can be bought for about $4.90 and the August 16 $120 call could be sold for about $1.80. This trade would cost $3.10 to open, or $310 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 $310.

    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 EHTH the maximum gain is $6.90 ($120 – $110= $10; $10 – $3.10 = $6.90). This represents $690 per contract since each contract covers 100 shares.

    Most brokers will require minimum trading capital equal to the risk on the trade, or $310 to open this trade.

    That is a potential gain of about 122% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.

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