A Triple Digit Opportunity After the News Pushes the Stock Up
Following news, rather than anticipating it, can be profitable for patient traders. An example of how this can work is found in recent news. According to PR Newswire,
Nevro Corp. (NYSE: NVRO), a global medical device company that is providing innovative, evidence-based solutions for the treatment of chronic pain, reported financial results for the second quarter ended June 30, 2019.
The stock was trading higher on the news.
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Revenue for the second quarter of 2019 was $93.6 million, a 3% decrease compared to $96.1 million during the prior year period. U.S. revenue for the second quarter of 2019 was $78.1 million, a 2% decrease compared to $79.9 million in the prior year period.
The year-over-year decrease in U.S. revenue was primarily driven by the impact of customer destocking associated with the Company’s previously announced decision to alter its practice regarding certain high-volume product orders.
International revenue was $15.5 million compared to $16.2 million in the prior year period. This represents a 4% decrease on an as-reported basis and a 2% increase on a constant currency basis.
Keith Grossman, Chairman, CEO and President, noted, “Our second quarter 2019 financial results demonstrate sequential improvement across the board, as well as some encouraging early signs of progress in our commercial execution, including patient treatment activity with our customers.
In the U.S., we saw a year-over-year increase in patient trial procedures of 15%, while permanent implant procedures grew 10% over the prior year period.”
“I remain confident that as we continue to refine our commercial strategies and execution, prepare for our upcoming new product launches and drive interest in HF10 therapy, we will be well-positioned to enter our next phase of growth as we move into late 2019 and enter 2020.”
Gross profit for the second quarter of 2019 was $63.9 million, a 6% decrease compared to $67.9 million in the prior year period. Gross margin was 68% in the second quarter of 2019 compared to 71% in the prior year period.
Operating expenses for the second quarter of 2019 were $90.5 million, a 19% increase compared to $76.1 million in the prior year period. The year-over-year increase in operating expenses was primarily driven by U.S. sales and marketing personnel costs, as well as clinical trial-related expenses. Legal expenses associated with patent litigation were $3.9 million for the second quarter of 2019, compared to $5.8 million in the prior year period.
The news pushed the stock above apparent resistance on the chart.
A Trade for Short Term Bulls
As with the ownership of any stock, buying NVRO 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 NVRO
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 NVRO, the November 15 options allow a trader to gain exposure to the stock.
A November 15 $75 call option can be bought for about $4.68 and the November 15 $80 call could be sold for about $2.60. This trade would cost $2.08 to open, or $208 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 $208.
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 NVRO the maximum gain is $2.92 ($80 – $75= $5; $5 – $2.08 = $2.92). This represents $292 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $208 to open this trade.
That is a potential gain of about 140% in NVRO based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.