This China Play Has Triple Digit Potential
Trade summary: A bull call spread in NeoGenomics, Inc. (Nasdaq: NEO) using the November $45 call option which can be bought for about $2.25 and the November $50 call could be sold for about $0.90. This trade would cost $1.35 to open, or $135 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 $135. The maximum gain is $365 per contract. That is a potential gain of about 170% based on the amount risked in the trade.
Now, let’s look at the details.
Accesswire reported that NEO, “ a leading provider of oncology testing and global contract research services, announced plans to open a state-of-the-art research laboratory in China in association with the new lab PPD, Inc. (NASDAQ: PPD) is opening in Suzhou.
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Within PPD’s 67,000-square-foot (6,224-square-meter) facility, NeoGenomics will maintain a dedicated laboratory and additional shared lab operational space.
The NeoGenomics laboratory is expected to support Greater China-focused clinical trials and testing for global and local Chinese pharmaceutical companies. Based in Suzhou New District, Jiangsu Province, the NeoGenomics research facility will be operational in 2021.
NeoGenomics will offer pharma research services, including early translational and clinical research trial studies supporting global pharmaceutical initiatives.
“We have kept our pharma customers’ needs as top priority by strategically expanding our footprint in Europe, Asia-Pacific and now, into Greater China,” said Douglas VanOort, NeoGenomics’ Chairman and Chief Executive Officer.
“Last year we expanded our global presence by inaugurating our Singapore clinical lab in Science Park. This year, despite the COVID-19 pandemic, we have proceeded with our expansion plans in China to continue to provide the best-in-class service in oncology.”
In a very similar arrangement to the laboratory opened in Singapore in 2019, NeoGenomics will establish services in the same building as PPD. This continues the multi-year alliance between the two companies and highlights the complementarity of technologies and service offerings of both organizations.
“With the new Fort Myers laboratory expansion in progress, our labs in Houston, Aliso Viejo, and San Diego (La Jolla) within North America, and in Rolle, Switzerland and Singapore, we are truly transforming our pharma services business into a world-class suite for global pharma clinical research and companion diagnostic needs,” added VanOort.
“The Suzhou lab gives us a substantial technology and regional advantage to serve our pharma clients quickly and efficiently.”
The stock is breaking above resistance and targeting the mid-$40s on its next move.
Since 2018, the stock has moved higher in a series of basing/rising patterns. This shows the stock is not subject to bouts of irrational exuberance and could deliver long-term gains to conservative investors.
A Specific Trade for NEO
For NEO, the November 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.
A November $45 call option can be bought for about $2.25 and the November $50 call could be sold for about $0.90. This trade would cost $1.35 to open, or $135 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 $135.
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 NEO, the maximum gain is $365 ($50- $45= $5; 5- $1.35 = $3.65). This represents $365 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $135 to open this trade.
That is a potential gain of about 170% 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 NEO 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 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.