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Earnings Season Sets Up a Potential Gain of 349%

Earnings Season Sets Up a Potential Gain of 349%

Trade summary: A bull call spread in ICU Medical, Inc. (Nasdaq: ICUI) using the August $195 call option which can be bought for about $3.10 and the August $200 call could be sold for about $2.19. This trade would cost $0.91 to open, or $91 since each contract covers 100 shares of stock.

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  • In this trade, the maximum loss would be equal to the amount spent to open the trade, or $91. The maximum gain is $409 per contract. That is a potential gain of about 349% based on the amount risked in the trade.

    Now, let’s look at the details.

    GlobeNewswire reported on the earnings.

    ICUI posted, “second quarter 2020 revenue was $303.4 million, compared to $312.3 million in the same period last year. GAAP gross profit for the second quarter of 2020 was $106.3 million, as compared to $103.9 million in the same period last year.

    GAAP gross margin for the second quarter of 2020 was 35%, as compared to 33% in the same period last year.

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  • GAAP net income for the second quarter of 2020 was $18.9 million, or $0.88 per diluted share, as compared to GAAP net income of $22.8 million, or $1.06 per diluted share, for the second quarter of 2019.  Adjusted diluted earnings per share for the second quarter of 2020 were $1.65 as compared to $1.99 for the second quarter of 2019.

    Also, adjusted EBITDA was $58.1 million for the second quarter of 2020 as compared to $66.7 million for the second quarter of 2019.

    Vivek Jain, ICU Medical’s Chief Executive Officer, said, “Second quarter results were generally in line with our expectations and reflected strong demand for our infusion pumps due to the COVID-19 pandemic.”

    ICU Medical, Inc. is engaged in the development, manufacture and sales of medical devices used in infusion therapy, oncology and critical care applications.

    The company’s product line includes needlefree connection devices, custom infusion sets, closed system transfer devices (CSTD) for the handling of hazardous drugs, advanced sensor catheters, needlefree closed blood sampling systems, disposable pressure transducer systems and hemodynamic monitoring systems.

    The primary critical care products it manufactures are Hemodynamic Monitoring Systems, SafeSet Closed Blood Sampling and Conservation System, Transpac Consumable Blood Pressure Transducers and Other Critical Care Products.

    The primary oncology products it manufactures are ChemoLock Needlefree CSTD, ChemoClave Needlefree CSTD and Diana Hazardous Drug Compounding System. As of December 31, 2016, its products were used in acute care hospitals and ambulatory clinics in more than 65 countries throughout the world.

    The stock appears to have found support. This could set up a rally.

    ICUI daily chart

    The longer-term chart using weekly data shows a similar pattern with potential support. The big drop in 2019 came after the company lowered earnings guidance.

    ICUI weekly chart

    At that time, the company said to expect adjusted earnings of $7.55 to $8.15 per share, down from previous estimate of $9.00 to $9.90 per share. Earnings remain near that level, less than $7 for this year. The stock has not moved much in that time, offering potential value.

    A Specific Trade for ICUI

    For ICUI, the August options allow a trader to gain exposure to the stock. This trade will be open for about six weeks and allows for traders to turn over capital quickly, potentially compounding gains several times a year.

    An August $195 call option can be bought for about $3.10 and the August $200 call could be sold for about $2.19. This trade would cost $0.91 to open, or $91 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 $91.

    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 ICUI, the maximum gain is $409 ($200- $195= $5; 5- $0.91 = $4.09). This represents $409 per contract since each contract covers 100 shares.

    Most brokers will require minimum trading capital equal to the risk on the trade, or $91 to open this trade.

    That is a potential gain of about 349% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.

    A Trade for Short Term Bulls

    As with the ownership of any stock, buying ICUI 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 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.

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