Cabot Profit Booster Issue: July 23, 2024

Before we get into today’s covered call idea, coming out of July expiration we have a couple positions that we need to address. Let’s dive in …

Pinterest (PINS), Sweetgreen (SG), Howmet Aerospace (HWM) and Hims & Hers (HIMS) all closed below their strike prices on Friday, which means the calls we sold expired worthless, leaving us with our stock positions today. Let’s exit those stock positions ahead of earnings season.

To execute these trades you need to:

Sell PINS Stock

And

Sell SG Stock

And

Sell HWM Stock

And

Sell HIMS Stock.

Moving on …

Led by a steep decline in the formerly red-hot Semiconductor sector, the market had a somewhat “gross” five-day stretch. For the week, the S&P 500 fell 2.35%, the Dow rose marginally, and the Nasdaq lost 4.35%.

The Stock – Halozyme (HALO)

Halozyme is acting like a brand-new stock during the past few weeks thanks to a sharp change in investor perception surrounding the firm’s patent position. For years, Halozyme’s claim to fame has been its Enhanze drug delivery system, which is based on an enzyme that safely breaks down cellular barriers to bulk liquid flow—allowing IV treatments to be given at a far faster pace (often minutes instead of hours), which is more convenient for patients and is a boon for treatment clinics.

The company has been able to ink deals to produce Enhanze versions of popular drugs from many big players (two of them—one from Argenx, one from Roche—received approvals in June), resulting in a stream of milestone payments (which often continue even after approval) and royalties, driving sales and earnings nicely higher in recent years. However, the stock had been stuck in the mud during the past couple of years. Why?

Patent worries, with many thinking Halozyme’s shelf life could be short (only a couple more years) before competition is allowed to come in. But a recent E.U. decision involving the patent on an Enhanze drug extended protection to 2029, and many are taking it as a sign that Halozyme has a years-long runway ahead of it. Indeed, after the patent decision, the top brass here bumped up an already huge long-term forecast, saying that it thinks royalty revenue (due to growth in existing offerings and many more approvals to come) can lift about 140% from last year through 2027, while total revenues double and earnings move from up $2.77 last year to $7.30 or so in 2027!

Of course, perception is reality, so if some fresh worries pop up on the patent front it would hurt the stock, but it certainly looks like the best is yet to come and the E.U. decision cleared the air.

Technical Analysis

HALO is the kind of fresher name that could have juice if the market (and the upcoming earnings report) cooperates. The stock bobbed and weaved for about a year (May 2023 to May of this year) before finally tightening up a bit, and the patent-induced breakout in June came on the stock’s heaviest volume in more than a year. Perhaps more important is that HALO has been edging higher since then, ignoring the market’s tumultuous action and holding north of its 25-day line. Stop — 46.5

The Covered Call Trade

Buy Halozyme (HALO) Stock at 55, Sell to Open August 55 Strike Calls (exp. 8/16) for $1.75, or a Net Price of 53.25 or less

Static Return: $175 per covered call (3.28%)

Breakeven: 53.25

Covered Call Return (if assigned): $175 per covered call (3.28%)

Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.

However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 53.25 or less. (In this case 55 minus 1.75 = 53.25. Or another example is you could pay 55.15 for the stock and sell the call for 1.90, which also equals 53.25)

For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …

Open Positions

The next Cabot Profit Booster issue will be published on July 30, 2024.

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