This Advanced Treatment Can Save Lives, and Could Deliver a 118% Gain
Trade summary: A bull call spread in Penumbra, Inc. (NYSE: PEN) using the August $200 call option which can be bought for about $8.50 and the August $210 call could be sold for about $5.36. This trade would cost $3.14 to open, or $314 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 $314. The maximum gain is $686 per contract. That is a potential gain of about 118% based on the amount risked in the trade.
Now, let’s look at the details.
Business Wire reported “PEN, a global healthcare company focused on innovative therapies, today announced its next phase for vascular franchise growth with U.S. commercial availability of the Indigo System Lightning 12… “
The stock broke out to a new high on the news. This completes a trading range that dates back to February and breaks resistance that was tested three times. The more times resistance is tested, the more important it can be and the greater the potential size of the subsequent price move.
The report continued, “Innovating the Indigo System peripheral thrombectomy technology is a key part of the company’s overall growth plan to continue momentum in its fast-growing vascular franchise.
The Indigo System Lightning 12 is the company’s next generation aspiration system for peripheral thrombectomy. Lightning 12 combines the new Indigo System CAT 12 Aspiration Catheter with Lightning Intelligent Aspiration, enabling physicians to focus on optimizing thrombus removal using the system’s unique clot detection mechanism.
CAT12 is a large-lumen aspiration catheter that incorporates novel laser-cut hypotube-based catheter engineering to provide advanced deliverability and torqueability within the body. This combination of intelligent aspiration and large-lumen catheter engineering makes Lightning 12 Penumbra’s most advanced clot removal technology.
“Penumbra continues to lead the field of clot management by bringing highly innovative technology to address the challenges that we as physicians face while caring for our patients,” said Frank Arko, M.D., chief, Division of Vascular and Endovascular Surgery, Sanger Heart and Vascular Institute, North Carolina.
“When dealing with thrombus, we have learned that it is the combination of the catheter along with powered aspiration that yields the most effective results. Lightning 12 with Intelligent Aspiration is a giant leap forward for the field of thrombectomy, and we have been very impressed with the early results at Sanger.”
“The simplicity of Lightning Intelligent Aspiration combined with the significant advancements in catheter engineering will enable us as physicians to get closer to our thrombus removal goal in a safe manner, as well as our goal of improving clinical outcomes for our patients,” said Patrick Muck, M.D., chief, Vascular Surgery, Good Samaritan Hospital, Ohio.
“Lightning 12 provides physicians with an integrated system that not only removes large amounts of thrombus but also detects and manages clot removal,” said Jay Mathews, M.D., interventional cardiologist, Manatee Memorial Hospital, Florida.
“This is a very important advancement for the field of thrombus management, and our initial experience at Manatee Memorial with this technology shows us that we are now closer to single-setting care for our patients.”
The stock has been relatively range bound for two years. A breakout could attract interest from technical traders.
A Specific Trade for PEN
For PEN, the August 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 August $200 call option can be bought for about $8.50 and the August $210 call could be sold for about $5.36. This trade would cost $3.14 to open, or $314 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 $314.
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 $686 ($210- $200= $10; 10- $3.14 = $6.86). This represents $686 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $314 to open this trade.
That is a potential gain of about 118% 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 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 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.