Tuesday there were some rays of sunlight amidst the storm, but until proven otherwise, we are in a bear market and should proceed with caution. This brings me to this week’s trade, which is a defensive trade on a recent outperformer, that we recently traded successfully

Cabot Profit Booster Issue: June 22, 2022

Market Overview
Before we dive into this week’s idea, I want to address our stock positions in EQT and DLTR coming out of expiration. To recap, the June calls that we sold on both stocks expired Friday, leaving us today with our stock positions.

Because of the large premiums we can sell in both stocks, and the fact that we have just one position coming out of June expiration, we are going to continue to sell calls on both stocks. Here are the trades:

EQT – Sell to Open the July 38 Calls (exp. 7/15) for $1

DLTR – Sell to Open the July 160 Calls (exp. 7/15) for $3

Please note, we will continue to use Mike’s stock stops for these two trades.

Moving on …

The bear market has shown no signs of slowing down as the S&P 500 posted its 10th week of losses out of the last 11, and had its worst week since 2020. The numbers weren’t pretty as the S&P 500, Dow and Nasdaq all fell between 4.5-6%.

Tuesday there were some rays of sunlight amidst the storm, but until proven otherwise, we are in a bear market and should proceed with caution.

This brings me to this week’s trade, which is a defensive trade on a recent outperformer, that we recently traded successfully.

The Stock – Halozyme (HALO)
Why the Strength
Rapid, reliable sales and earnings growth? Check. A unique offering that’s providing a major benefit? Check. Years of growth potential based on its pipeline? Check. A stock that’s resisting the worst bear market in 13 years? Check. Halozyme should remain near the top of your watch list because it has most, if not all, of the characteristics of a winner.

As we’ve written before, the story here is mostly about Enhanze, a technology that allows drugs to be safely delivered via IV in minutes instead of hours—and results in both milestone payments when deals are signed and as drugs progress through trials ($135 million worth last year, with a similar figure expected this year), but more important, royalties (usually mid-single digits, lasting a minimum of 10 years from launch), which totaled $204 million last year and should grow 50% in 2022 thanks mostly to two big drugs (one by Janssen and one by Genentech).

But management is thinking much bigger, with a $1 billion royalty goal in 2027 as some “wave 3” Enhanze-enabled drugs hit the market during the next couple of years (including a potentially big autoimmune treatment from Argenx, the standard version of which was just released; ARGX is also in this week’s Top Ten).

But there’s even more good news, stemming from Halozyme’s recent buyout of Anteres Pharmaceuticals, which brought some commercial products (just launched a new testosterone replacement therapy) and a royalty business (an auto-injector technology used on EpiPen and other drugs). There are some fears about patent expiration on the firm’s enzyme that is behind Enhanze, but management is adamant there shouldn’t be any issues—and even sees potentially higher royalties from a new enzyme that it’s patenting that has extended room temperature stability. As for the numbers, they’re great, with projected earnings growth low this year solely due to a higher tax burden (about 55 to 60 cents worth). It’s a solid story.

Technical Analysis
HALO is one of the few stocks out there that’s setting up a legitimate launching pad—it started back in February 2021, found a bottom from December through February and has been rallying in recent weeks. The latest action is also encouraging, with a very strong snapback after the market’s low in May and a much higher low last week. Stop – 34

The Covered Call Trade
Buy Halozyme (HALO) Stock at 45.5, Sell to Open July 45 Strike Calls (exp. 7/15) for $2, or a Net Price of 43.5 or less

Static Return: $150 per covered call (3.44%)

Breakeven: 43.5

Covered Call Return (if assigned): $150 per covered call (3.44%)

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 43.5 or less. (In this case 45.5 minus 2 = 43.5. Or another example is you could pay 45 for the stock and sell the call for 1.50, which also equals 43.5)

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
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.

The next Cabot Profit Booster issue will be published on June 28, 2022.

Analyst Bio

Jacob Mintz

Jacob Mintz is a professional options trader and editor of Cabot Options Trader. Using his proprietary options scans, Jacob creates and manages positions in equities based on unusual option activity and risk/reward.

Jacob developed his proprietary system during his years as an options market maker on the floor of the Chicago Board of Options Exchange, where he ran several trading crowds for nearly 10 years.

After a successful career on the trading floor Jacob was tasked with setting up a trading desk at a top-tier options trading company, trading against the most sophisticated hedge funds and institutions in the world.

Today Jacob trades for himself, coaches and teaches about options trading, and runs our Cabot Options Trader, Cabot Options Trader Pro and Cabot Profit Booster advisories. Jacob lives in North Carolina with his wife and two kids who keep him very busy with their sports and social calendars.