By Paul Price of Market Shadows
Medical technology company Edwards Lifesciences (EW) has been a major success in cardiac care since being spun off from Baxter International (BAX) in 2000.
Shares had climbed from under $10 (split adjusted) in 2002 to more than $110 at their peak in 2012. EPS surged from $0.68 to $2.69 over that decade.
Profits are expected to come in even higher, $3.00 – $3.10, for the year wrapping up this month. Despite that, the stock sold down to near a three-year low on Monday.
Market Shadows played the dip by selling two contracts of the Jan. 15, 2016 puts at the $65 strike price. The $11 per share premium takes our ‘if put’ price to just $54. That would represent about 18x this year’s EPS which is very low for this company on a historical basis.
Other than the Crash of 2008-09 an eighteen multiple is lower than any annual P/E dating back all the way to 2003. There were many good choices in terms of strike prices and expiration dates. We went with in-the-money 2016 LEAPs to bring in substantial premium up front while lowering our break-even price to a very acceptable level.
Our maximum profit of $2,200 (100% of the premium received) will be captured if EW rallies back to above $65. That’s just 3.8% above the $62.66 quote at the time of our trade. If the puts are exercised we will be forced to buy 200 shares of EW for a net cost of $10,800 ($65 strike price – $11 premium = $54 /share).
Note: This is our first sale of a year 2016 expiration for our Virtual Put Writing Portfolio . If EW makes a quick rebound we may very well close it much earlier.
