News Just Might Boost This Stock From Recent Lows
PR Newswire reported,
Varian (NYSE: VAR) has received notice from the Customs Tariff Commission of the State Council of China that medical linear accelerators are excluded from the additional tariffs China imposed on US products that began on August 23, 2018.
Varian Medical Systems, Inc. is a manufacturer of medical devices and software for treating cancer and other medical conditions with radiotherapy, cardiac radioablation, radiosurgery, proton therapy and brachytherapy. The Company also has Varian Particle Therapy (VPT) and the operations of the Ginzton Technology Center (GTC).
Its VPT business develops, designs, manufactures, sells and services products and systems for delivering proton therapy, another form of external beam radiotherapy using proton beams for the treatment of cancer.
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Its ProBeam system is capable of delivering intensity modulated proton therapy (IMPT) using pencil beam scanning technology. Its ProBeam Compact is a single room proton therapy product. Through its subsidiary, Cooperative CL Enterprises, the Company distributes radiotherapy equipments in Taiwan.
The tariff exclusion is retroactive, and the company expects to be eligible for a refund from tariffs that have been levied since the additional tariffs were implemented. The exemption will become effective on September 17, 2019.
“We are grateful for the China government’s determination to fight cancer and its recognition of the positive impact of radiotherapy treatments,” said Dow Wilson, president and chief executive officer, Varian.
“Varian envisions a world without fear of cancer, and we are committed to empowering our users to achieve new victories against cancer with our cancer care solutions. The exemption allows us to continue to focus on the fight against cancer.”
Varian is in its quiet period but will evaluate if further comments are necessary after completing its assessment of the impact of this exclusion, including the timing and process for any refunds.
The news could boost the stock from recent lows.
In the long run, the recent sell off could be a pull back in a longer term up trend. The chart pattern does suggest it was a steep pull back and the chart also reveals that the selling appears to have subsided at an important support level.
Overall, the chart is bullish in many ways.
A Trade for Short Term Bulls
As with the ownership of any stock, buying VAR 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 VAR
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 VAR, the October 18 options allow a trader to gain exposure to the stock.
An October 18 $120 call option can be bought for about $4.30 and the October 18 $125 call could be sold for about $2.15. This trade would cost $2.15 to open, or $215 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 $215.
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 VAR the maximum gain is $2.85 ($125 – $120= $5; $5 – $2.15 = $2.85). This represents $285 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $215 to open this trade.
That is a potential gain of about 33% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.