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Earnings Sets Up a Trading Opportunity in This Healthcare Stock

Earnings Sets Up a Trading Opportunity in This Healthcare Stock

Trade summary: A bull call spread in HCA (Holdings) Limited (NYSE: HCA) using the September $125 call option which can be bought for about $6.80 and the September $130 call could be sold for about $4.63. This trade would cost $2.17 to open, or $217 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 $217. The maximum gain is $283 per contract. That is a potential gain of about 30% based on the amount risked in the trade.

    Now, let’s look at the details.

    HCA Healthcare (NYSE: HCA) rose [recently] after the hospital manager reported second-quarter earnings that topped analysts’ forecasts.

    HCA daily chart

    The Street reported, “HCA Healthcare posted net income of $1.08 billion, or $3.16 a share, in the latest quarter, up from $783 million, or $2.25 a share, a year earlier.

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  • Results for the latest quarter were boosted by $822 million, or $1.73 a share, in government stimulus income that came from the CARES Act for pandemic relief.

    Revenue was $11.07 billion in the quarter, down from $12.6 billion in the year-ago quarter, HCA Healthcare said.

    Analysts had been calling for a loss of 20 cents a share on second-quarter revenue of $10.09 billion.

    Adjusted Ebitda in the second quarter was$2.67 billion, up from $2.29 billion a year ago.

    Not all the numbers were rosy. Same-facility admissions at HCA Healthcare slid 12.8% in the latest quarter, same-facility inpatient surgeries dipped 15.7% and same-facility outpatient surgeries dropped 32.6%.

    Those decreases resulted from the suspension of elective treatment as a result of the coronavirus pandemic.

    Business Wire added, “Patient volumes across most service lines were significantly impacted in April due to state and local policies implemented to contain the spread of Covid-19 and preserve personal protective equipment,” the company said in a statement Wednesday.

    But improvement came, HCA Healthcare said. “Patient volumes gradually improved in May and June as states began to re-open and allow for non-emergent procedures.”

    “Throughout this remarkably challenging pandemic, I am reminded daily of what an incredible and resilient organization we have,” said Sam Hazen, Chief Executive Officer of HCA Healthcare. “I see our colleagues and physicians working every day to do the right thing for others, and I want to thank them for their dedication to our patients and the tremendous sacrifices they, and their families, are making in the midst of this global health crisis.”

    “With our continued focus on our patients and the well-being of our colleagues and physicians, we can be proud of our accomplishments. I am confident that we are well positioned for long-term success and to continue the remarkable legacy that is HCA Healthcare,” stated Hazen.

    HCA appears to have formed a base and could move towards resistance at the $150 level, a price that could provide significant resistance.

    HCA weekly chart

    A Specific Trade for HCA

    For HCA, the September 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.

    A September $125 call option can be bought for about $6.80 and the September $130 call could be sold for about $4.63. This trade would cost $2.17 to open, or $217 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 $217.

    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 HCA, the maximum gain is $283 ($130- $125= $5; 5- $2.17 = $2.83). This represents $283 per contract since each contract covers 100 shares.

    Most brokers will require minimum trading capital equal to the risk on the trade, or $217 to open this trade.

    That is a potential gain of about 30% 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 HCA 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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