Using Options to Increase your Profits

We love options here at Capital 19. You can use them in so many different and varied ways. They can take a bit to understand but there so is much free information out there on the web you can get your head around the basics fairly easily.

Today we want to use an example of one way you can use options to increase your profits and we are going to at an opportunity in Becton, Dickinson and Company (BDX)

BDX has been making and selling medical equipment since 1987. But it came up on our radar because it has a curious track record at this time of year.

Between October 26, and January 19, BDX stock has moved up, every year, for the last 18 years. Seeing as today is October 26 we got excited about the possibility for profits.

The average move-up between these dates for the last 18 years has been 9.09%. 9% in just 3 months is nothing to be sneezed at.

Additionally, we like the way this stock has been moving in a nice wide channel for almost 3 years.  

BDX Stock Price

The stock has been moving back and forth between about 220 and 270 for a long time and right now is in the lower half of that channel. It has just bounced off support at 220 and we are expecting a move back towards 270

This is a setup where both the seasonality and technicals are favouring a move higher. Based on past years the average move higher is 9%. If it can get up to 270 that would represent a 12% gain from here.

But look at what happens if we use options for this trade rather than buying the stock. The seasonal move ends January 19 so we will use the January 15 2021 expiry Call Options for this trade.

The stock last closed at 240.28

You can buy the 200 strike call for $42.90 and sell the 240 strike call for $13.50. This gives you a net outlay of $29.40 or $2490 per option contract.

Let’s take a look at the payoff at expiry for a range of potential stock prices

What this table is telling us is, if the stock finishes at $240 or above on January 15th, 2021, our option trade (called a Bull Call Spread) will result in a 36% profit. Almost 4 times better than the expected stock return.

If the stock closes 5% lower, then our spread will lose 3.8%, still better than the stock loss of 5%

As you can see, using a simple option trade like this improves our percentage returns as compared to buying the stock itself.

But there is always a risk for this. In this case, you can see the returns should the stock drop 10% or more. Our loss becomes larger than would happen in just buying the stock. The best way to manage this risk is with position sizing.

With the technical and seasonals lining up, we like the potential offered by BDX and as you can see, we can make it an even better potential return if we use options to increase our profits.

Disclaimer: Capital 19 Pty Ltd ABN 17 124 264 366 AFSL 441891 (‘Capital 19’) believes the information contained is reliable, however, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. This communication is for general information only and was prepared for multiple distributions and does not take account of the specific investment objectives of individual recipients and it may not be appropriate in all circumstances. Persons relying on this information should do so considering their specific investment objectives and financial situations. Any person considering action based on this communication must seek individual advice relevant to their circumstances and investment objectives. Subject to any liability which cannot be excluded under the relevant laws. Any opinions or forecasts reflect the judgment and assumptions of Capital 19 and its representatives based on information at the date of publication and may later change without notice. Any projections contained in this presentation are estimates only and may not be realised in the future. The investment manager certifies that all the views expressed in this document accurately reflect their views about the companies and securities referred to in this document and that their remuneration is not directly or indirectly related to the views. Capital 19, its directors, representatives, employees or related parties may have an interest in any of the companies and securities in this document and may earn revenue from the sale or purchase of any financial product referred to in this document or any advice. Past performance is not a reliable indicator of future performance. Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this document is prohibited without obtaining prior written permission from Capital 19.