There’s More Than COVID-19 in Biotech as This Possible 34% Gain Shows
Trade summary: A bull call spread in TNDM Logistics, Inc. (NYSE: TNDM) using the April 17 $65 call option which can be bought for about $5.63 and the April 17 $70 call could be sold for about $3.50. This trade would cost $2.13 to open, or $213 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 $213. The maximum gain is $287 per contract. That is a potential gain of about 34% based on the amount risked in the trade.
Now, let’s look at the details.
Business Wire reported, that TNDM “announced U.S. Food and Drug Administration (FDA) clearance of its Basal-IQ technology as an interoperable automated glycemic controller (iAGC). This is the second system to receive iAGC designation by the FDA, following the Company’s clearance of the t:slim X2 insulin pump with Control-IQ™ technology in December 2019.
The FDA has classified three categories for the interoperability of devices as a complete automated insulin dosing (AID) system, which include an alternate controller-enabled insulin pump (ACE pump), an integrated continuous glucose monitor (iCGM) and an iAGC.
The t:slim X2 insulin pump was also the first to receive an ACE infusion pump classification in February 2019, and the first insulin pump designated as compatible with iCGM devices in June 2018.
“Aligning Basal-IQ technology with Control-IQ technology under the FDA’s new regulatory path helps streamline our internal processes and provides us with a consistent approach to making future product enhancements,” said John Sheridan, president and chief executive officer.
“Customer choice is a core tenet of our Company and this clearance supports our commitment to the interoperability of our AID technologies with our current and future insulin pump offerings.”
The news comes as the stock is giving a momentum buy signal. Stochastics, a popular momentum indicator, is shown at the bottom of the chart. Similar patterns in stochastics have coincided with at least brief up turns in the price of the stock.
The weekly chart shows that there is support near the current level. This price is near the level where the uptrend began in early 2019 and buyers seek a second chance to get into stocks in hot sectors like biotech.
While there is a probability of higher prices in TNDM, there is still a risk of a broad market down turn or even a broad market collapse. In the current environment, strategies focused on risk could be the best tools for gaining exposure to the market.
A Specific Trade for TNDM
For TNDM, the April 17 options allow a trader to gain eTNDMsure 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 $65 call option can be bought for about $5.63 and the April 17 $70 call could be sold for about $3.50. This trade would cost $2.13 to open, or $213 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 $213.
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 TNDM the maximum gain is $2.87 ($70- $65= $5; $5 – $2.13 = $2.87). This represents $287 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $213 to open this trade.
That is a potential gain of about 34% 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 TNDM 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.