Local News Can Point to Trading Ideas
Traders often look at finance web sites for news. This makes sense because the sites will highlight important announcements from companies. They often link to stories about earnings reports or other corporate announcements.
At least some of these news stories are written with artificial intelligence. The difference between a human writer and software is often noticeable. The stories generated by software will include just the facts from the news release like earnings numbers. They may add a detail or two that is available from a review of technical indicators or price performance.
Local news reports often add details that add background, for example showing the earnings report while adding that the company is building a new local facility. That is the type of information that indicates the gains could be sustainable in the longer run.
An example of this was in the Milwaukee Business Journal which recently reported,
“Exact Sciences Corp., the Madison manufacturer of the Cologuard take-home colon cancer test, met its projected 2018 full-year revenue number, reporting total revenue of $454.5 million in an earnings statement Thursday.
The company completed 934,000 Cologuard tests in fiscal 2018, 64 percent higher than in 2017.
The company (Nasdaq: EXAS) in January stated it anticipated reporting total revenue between $454 million and $455 million.
The revenue total is a 71 percent increase compared with 2017, when the company reported $266 million. Net loss for 2018 was $175 million, relative to $114 million in 2017.
The company anticipates revenue of $710 million to $730 million for 2019.
“The Exact Sciences team made tremendous progress in 2018, and we look forward to helping more people get screened for colorectal cancer in 2019 through our partnership with Pfizer,” said Kevin Conroy, chairman and CEO of Exact Sciences, in a statement provided by the company.
“Our team continues working hard to advance our pipeline of liquid biopsy tests to deliver additional life-changing innovations in early cancer detection.”
Fourth quarter revenue was $143 million, which also fell in line with anticipated sales of between $142.5 and $143.5 million. The net loss for the quarter was $54 million, or 44 cents per share.
Both sales and income beat analysts’ consensus for the quarter of $134.2 million in sales and a net loss of 49 cents a share, according to investment website Seeking Alpha.
Exact Sciences is building a new 138,000-square-foot headquarters in Madison’s University Research Park that’s scheduled to be completed in early 2020.”
The initial response to the news was bullish.
The latest rally is a potential breakout on the longer-term chart as well.
A Trade for Short Term Bulls
As with the ownership of any stock, buying EXAS 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 EXAS
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 EXAS, the March 15 options allow a trader to gain exposure to the stock.
A March 15 $97.50 call option can be bought for about $2.70 and the March 15 $100 call could be sold for about $1.75. This trade would cost $0.95 to open, or $0.95 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 $95.
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 EXAS the maximum gain is $1.55 ($100 – $97.50 = $2.50; $2.50 – $0.95 = $1.55). This represents $155 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $95 to open this trade.
That is a potential gain of about 63% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.