Snow day in the North East; as a consequence the kids are home and my son is assisting with the morning post. Futures are higher, by 8 handles at this writing, with 15 minutes until Non-Farm Payrolls are released. Expectations are high.
Two biotech/healthcare stocks are on my radar this morning. These are presented as informational, therefore we can discuss further, during the LIVE session this morning.
NewLink Genetics is a candidate mentioned yesterday, during the evening session. It is a pharmaceutical stock.
This is a high tight flag candidate, in addition to a possible income trade. Let’s talk about the high tight flag for a moment, as the stock meets all the criteria. Here is a primer, if you are unfamiliar with the pattern. A break of the ascending flag would be you entry. Targets and expectations are covered further, in the article referenced herein. (Link)
You could buy the stock. Or, you could buy the stock and sell covered calls. Read on.
If you are conservative and you think the stock will move higher today you could enter a trade, buying shares of NLNK stock at $21.00 or better, in multiples of 100 shares and sell 1 option contract per 100 stock shares of the 2017 21-APR 20.0 call option for $3.60 (+/-).
- Open interest at the strike = 3397.
- Spreads are 3.00/3.60.
If you buy 1000 shares and sell at 3.60, your premium received is $3600.00, effectively making your cost basis $17,400.00 (17.40/share). This is your break even point; downside protection or insurance. If the stock pulled back to this point you will liquidate your shares and buy back your covered calls, you lose nothing. This trade will expire in 43 days and return 6.5% if the stock is assigned at expiration.
If you are bullish, you could also generate $2,050 by trading covered calls at the 22 strike. Buy the stock at 21.00 or better. You could sell 10 contracts of NLNK 2017 21-APR 22.00 CALL. If assigned, you could make a profit of $3,040. This trade will also get you 9.8% worth of downside protection for your stock (your break even point); assuming 1000 shares. 21,000 – 2050 = 18,950 0r 18.95/shr.
- Premium: $2,050
- Potential Profit if Stock is Above Strike: $3,050
- Downside Protect 9.8% (18.95 stop)
Wait for the Opening Range and reassess the above prior to making a decision to enter.
AKRX was a potential trade earlier in the week. It is a pharmaceutical stock. On Monday it received a downgrade. This is the trade we were considering at the time.
You could generate $950 by trading covered calls. You could sell 10 contracts of AKRX 2017 21-APR 25.00 CALL. If assigned, you could make a profit of $1,835. This trade will also get you 3.9% worth of downside protection for your stock. Premium received: $950 Potential Profit if Stock is Above Strike: $1,835 Downside Protection: 3.9% Break Even: 23.19 Delta = 0.43
AKRX pre-market : 22.82 ( -0.07 -0.31% )
The stock is holding major support at the solid HL depicted. (22.00 +/-) with RSI above 50. Note the Kirby above these levels and the recent volume.
Considering recent volume and the VBP support below, let’s analyze Institutional Investor holdings. These institutions currently hold $2.16 billion (+/-) or 79.9% in AKRX stock.
The top three institutional owners. Paulson & Co. Inc. owns $195.27 million in Akorn, Inc., which represents roughly 7.15% of the company’s market cap and approximately 9.06% of the institutional ownership. The second largest owner, Vanguard Group Inc, owns 6,678,166 shares of the stock, valued at $150.13 million. This is followed by Blackrock Fund Advisors, which currently holds $127.58 million worth of AKRX stock. That represents nearly 4.67% of its market capitalization.
Considering institutional holdings, we may assume we have decent downside protection, so let’s look at a potential trade. Hint: this is the way I look at income trades.
Side Note: open interest at the APR 25 strike is pretty small at 293, and the spreads are fairly wide 0.40/0.60. We’d like to see higher open interest and tighter spreads.
If you are bullish (assuming 1000 shares/use multiples of the following figures)
You could generate $400 by trading covered calls. You could sell 10 contracts of AKRX 2017 21-APR 25.00 CALL. If assigned, you could make a profit of $2,580. This trade will also get you 1.8% worth of downside protection for your stock.
- Premium received: $400
- Potential Profit if Stock is Above Strike: $2,580
- Downside Protection: 1.8%
If you are neutral
Side Note: open interest at the APR 22.50 strike is pretty small at 210, and the spreads are fairly wide 1.35/1.75. We’d like to see higher open interest and tighter spreads.
You could generate $1,350 by trading covered calls by selling at the BID. You could sell 10 contracts of AKRX 2017 21-APR 22.50 CALL. If assigned, you could make a profit of $1,030. This trade will also get you 5.9% worth of downside protection for your stock. You have to ask yourself, would I rather have more downside protection? If you do, then this is a better trade.
- Premium received: $1,350
- Potential Profit if Stock is Above Strike: $1,030
- Downside Protection: 5.9%
If the two stocks above open higher/flat/lower adjust the figures above. Then look at the potential for these trades and reanalyze.
Obviously, if you are bullish, you could just buy the stocks above. However, I would like you to start thinking about income potential in the way and open your mind to the possibilities. There are additional premium selling ideas, that you could use to profit. Covered calls are by far the most conservative. That said, there are risks. You must sell your position and buy back you covered calls if the stock pulls back to your break even point. This is effectively your stop.
I hope this helps.
Happy Trading – Vinny