Trade Beyond Meat With Limited Risk and a Possible Triple Digit Gain
Trade summary: A bull call spread in Beyond Meat, Inc. (Nasdaq: BYND) using the July $165 call option which can be bought for about $14.30 and the July $170 call could be sold for about $12.45. This trade would cost $1.85 to open, or $185 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 $1.85. The maximum gain is $315 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.
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Specifically, the article noted that the “company is offering Cookout Classic, a limited-edition burger 10-pack available at a majority of Walmart and Target stores in the U.S.
The 10-pack will go for a suggested price of $15.99, or $1.60 per quarter-pound patty. That compares with Beyond Meat’s two-patty pack, which sets non-carnivores back $5.99, or $3 per patty.
The Cookout Classic will be available through mid-August, or until supplies last, the company said in a statement.
It’s “intended to narrow the price gap between plant-based meat and animal protein, making delicious, nutritious and sustainable plant-based meat more accessible to more people.”
Beyond Meat has generated a lot of attention since it went public in May 2019. The stock went public at $25 a share and it has jetted up 170% over the past three months. But as of Tuesday’s close it’s also off 55% from its lifetime closing high near $235, set in July 2019.”
The chart below shows the complete trading history of BYND.
With support near $150 limiting risks, traders might want to consider since, “its revenue more than doubled in the first quarter from a year earlier to $97.1 million, despite the coronavirus pandemic. That surge was “primarily due to an increase in volume sold,” the company said.
Morningstar analyst Rebecca Scheuneman has a positive outlook for the company.
“We model Beyond’s market share increasing from 2.5% in 2019 to 6.8% in 2029, as [plant-based meats] gain a larger share of the overall meat category, and as Beyond’s brand continues to win with consumers, given its strong performance in taste tests and ongoing R&D investments,” she wrote in a commentary last month.
But there are risks, “Credit Suisse raised its target price on Beyond Meat to $142 a share from $90, while affirming its rating at neutral.
“Contrary to our initial view, Beyond may emerge as a net beneficiary of the pandemic in the near term due to strong demand in the retail channel (48% of sales) and in the long term due to rising consumer interest in healthier foods,” Credit Suisse analysts said in a commentary, according to Dow Jones.
A Specific Trade for BYND
For BYND, the July options allow a trader to gain exposure to the stock. This trade will be open for about four weeks and allows for traders to turn over capital quickly, potentially compounding gains several times a year.
A July $165 call option can be bought for about $14.30 and the July $170 call could be sold for about $12.45. This trade would cost $1.85 to open, or $185 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 $185.
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 $3.15 ($170- $165= $5; 5- $1.85 = $3.15). This represents $315 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $185 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 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 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.