News About the Treatment of Pulmonary Embolism Sets Up a Potential 72% Gain
Penumbra, Inc. (NYSE: PEN) is a healthcare company focused on interventional therapies. The company designs, develops, manufactures and markets medical devices.
It has a portfolio of products that addresses medical conditions and clinical needs across two markets, neuro and peripheral vascular. The conditions that its products address include ischemic stroke, hemorrhagic stroke and various peripheral vascular conditions that can be treated through thrombectomy and embolization procedures.
PEN focuses on developing, manufacturing and marketing products for use by specialist physicians, including interventional neuroradiologists, neurosurgeons, interventional neurologists, interventional radiologists and vascular surgeons.
Its neuro products include Neurovascular Access, Neuro Thrombectomy (Ischemic Stroke), Neurovascular Embolization (Brain Aneurysms) and Neurosurgical Tools (Hemorrhagic Stroke). Its peripheral vascular products include Peripheral Vascular Embolization and Peripheral Thrombectomy.
Recently, Business Wire reported,
“Penumbra … announced U.S. Food and Drug Administration 510(k) clearance for expanded indication of the Indigo® Aspiration System.
As part of the Indigo Aspiration System, the Indigo Aspiration Catheters and Separators are indicated for the removal of fresh, soft emboli and thrombi from vessels of the peripheral arterial and venous systems, and now, for the treatment of pulmonary embolism.”
The stock was up on the news.
The report continued, “Penumbra introduced the Indigo System, a continuous aspiration mechanical thrombectomy system designed to remove clot from arteries and veins in the peripheral vasculature, in 2014.
The Indigo System utilizes the Penumbra ENGINE™ aspiration source to deliver nearly pure, continuous vacuum suction to the Indigo System Aspiration Catheters to address emboli and thrombus in vessels of various sizes.”
The weekly chart shows a bullish picture for the stock with prices near a new 52 week high and in a broad trading range that dates back to the beginning of 2018.
There is significant potential for a large move if the stock breaks above the upper edge of the trading range, reaching new highs. This could unleash significant buying pressure and result in a rally. The pattern suggests a price target of $220 is within reach for the stock.
On the other hand, the pattern suggests a downside target of about $130 and if that level is violated on a sustained basis a move below $100 a share is likely for the stock.
A Trade for Short Term Bulls
As with the ownership of any stock, buying PEN 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 PEN
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 PEN, the February 21 options allow a trader to gain exposure to the stock.
A February 21 $165 call option can be bought for about $7.50 and the February 21 $170 call could be sold for about $4.60. This trade would cost $2.90 to open, or $290 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 $290.
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 PEN the maximum gain is $2.10 ($170 – $165= $5; $5 – $2.90 = $2.10). This represents $210 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $290 to open this trade.
That is a potential gain of about 72% in PEN, based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.