[Options] Getting Long a Leading Stock in a Leading Sector

Sean McLaughlin
September 8, 2021

...That's how we're supposed to do it, right?

JC & Strazza were riffing this morning on the strength in the Medical Equipment space and so we started brainstorming on some names to play since we expect the strength to continue.

There were a few names bandied about, but the chart and setup that most caught my attention was Boston Scientific Corp $BSX.

What I liked most was the recent consolidation which can act as a solid base of support for a move higher -- which would be all-time highs breaking out of a nearly 20 year base! As JC likes to say: "The bigger the base, the higher in space!" Seems this opportunity has a good shot at that:

However, the recent consolidation might still take a little bit more time to finish doing its thing and/or once $BSX starts breaking out it might move like a slow motion volcano eruption -- more flowing magma than explosive fireworks:

So, since we think this stock has a good chance of setting up an extended run, but we're cognizant of the chance it might take a little bit to catch the attention of the momentum hunters -- we're going to get a little creative here and get paid to wait.

Here's the Play:

I like a $BSX Nov/Mar 50-strike Call Calendar spread for a $1.15 debit or cheaper. This means I'll be long the March 50 calls and short an equal amount of November 50 calls for a net debit which represents the most I can lose in this trade if it short-circuits on us.

JC and I have a friendly disagreement on where our risk management level should be. He thinks long $BSX is valid as long as it stay above $41/share which is the summer low. But I'm going to be a little more aggressive with my stop and I'll be leaning against the $42/share level which was the low in August.

If $BSX closes below $42/share, that's my signal to close the entire position down and prevent any further losses.

On the upside, we've got a couple scenarios to be mindful of:

  1. If $BSX takes off faster than we think it will (a good problem to have), and it trades above $50 per share (our strike price) before the short November options expire, then we'll close the whole position down and book a nice profit. As you can see in the PnL graph above, the structure will actually begin to start eroding open profits as we get above our short 50 strike. No bueno.
  2. If $BSX takes its time and the short November 50 calls expired away worthless, then we'll treat the remaining long March 50 calls as a normal long calls position. And at any time (after November expiration) we have an opportunity to sell half of our long calls for $2.30 per contract (or better), we'll take it! This will remove all of our original risk capital from the trade and give us a free ride on the long side into March with the potential for theoretically unlimited gains.

That's how we're playing it!

If you have any questions on this trade, please send them here.

~ @chicagosean

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