Once High Flying Beyond Meat Could Be Setting Up a Double-Digit Gain
Trade summary: A bull call spread in Beyond Meat, Inc. (Nasdaq: BYND) using the April 17 $60 call option which can be bought for about $4.15 and the April 17 $65 call could be sold for about $1.87. This trade would cost $2.28 to open, or $228 since each contract covers 100 shares of stock.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $228. The maximum gain is $272 per contract. That is a potential gain of about 19% based on the amount risked in the trade.
Now, let’s look at the details.
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As the stock rose, demand for its product rose as fast food chains introduced meatless alternative sandwiches. The stock did sell off and recovery was thwarted as the market began to sell off earlier this year. But now an upgrade could boost shares as The Street reported.
The stock upgraded at DA Davidson to neutral from underperform on valuation.
“The recent drop in the stock means that the “long-term risk/reward is more balanced at current levels,” the firm said.
DA Davidson also reiterated its bull-case scenario, where the company gains more 10% of animal-meat market share in 10 years. DA Davidson said that scenario could generate more than $2.5 billion annually for Beyond Meat.
The pandemic hurts near-term sales and could call the company’s overseas expansion plans, especially in China, into question, the firm said.
On the other hand, the talk about coronavirus being initially passed from animals to humans “could serve as a flashpoint in the discussion around plant-based protein in the longer term.”
Not all analysts are bullish on the company. Goldman Sachs also recently issued a new opinion on shares of BYND. Analysts there downgraded BYND from neutral, saying that investors will not want to pay a premium for the stock in the current environment.
The firm slashed its price target to $39 a share from $129 and the analyst noted that “customer traffic declines represented a substantial near-term headwind for the company and its food service distribution carried risk.”
The daily chart shown below indicates a balanced approach could be best for this stock.
There is upside potential as the stock could bounce off the current levels which appear to provide support. However the fundamentals could be stretched if the economy struggles to reopen from the shutdown that has reduced demand for food service at all price points.
A Specific Trade for BYND
For BYND, the April 17 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 April 17 $60 call option can be bought for about $4.15 and the April 17 $65 call could be sold for about $1.87. This trade would cost $2.28 to open, or $228 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 $228.
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 BYND the maximum gain is $272 ($65- $60= $5; 5 – $2.28 = $2.72). This represents $272 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $228 to open this trade.
That is a potential gain of about 19% 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 BYND 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 BYND 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.