Amarin Corporation plc (AMRN) came across our desk as a potential candidate for covered calls or naked put purposes. We state this because the biotech stock is trading at just over $7 (low-priced stock), has buckets of volatility and is liquid. Before we get into the strategies and why Amarin is a promising candidate, let’s see how the technicals are shaping up at present.
As we can see on the long-term chart, the trend line which goes back to late 2014 definitely has significance. We state this because of the length of the trend line as well as the multiple contact points (where support held) we have had since then. From this information, we believe shares have pretty meaningful support around the $5 level. Nevertheless, if this level were to give way, the next multi-year support level comes in around the $4 level. As we can see from the long-term stochastics, shares remain oversold and are definitely due for a bounce if history repeats itself in this stock once more.
We monitor the technicals because we believe all known fundamentals are embedded into the share price action on the technical chart.
Value investors may bemoan the fact that the company is not profitable but this is due to a change in this fiscal year with +$0.01 being the bottom line expected. Then next year, analysts who follow this stock expect $0.48 to be achieved in earnings per share. This expected strong bottom line growth is on the back of strong top line growth (50% on average per year over the past 3 years). In fact, Amarin is expected to do $866+ million in sales in fiscal 2021. This means the forward sales multiple comes in at a very attractive 3.26. The median in this sector for example is over the 6 mark.
We also see encouraging trends on the balance sheet with $550 million of cash and ST investments making up well over 60% of the company’s assets. Furthermore, there is no debt to speak of in Amarin and shareholders’ equity came in at $602 million in the most previous quarter. It is no coincidence that now that the firm is debt-free, the company is beginning to report positive cash flow numbers. Over the past four quarters, operating cash flow came in at $18.5 million and free cash flow per share came in at $0.05. Therefore, if forward-looking top and bottom line expectations come in as predicted, then we expect to see much less share dilution going forward as the firm will be able to fund itself to a significant degree.
The above trends in the company’s financials are important because they protect against downside risk. What also protects against downside risk is the price of the stock ($7.26), the liquidity of its options and its volatility. Why? Well, concerning the price, the maximum downside is $7.26 per share or $726 per basket of 100 shares (if trading options). Amarin’s options have plenty of liquidity which means we can get filled at competitive prices. Furthermore, look at how high implied volatility is at present in AMRN especially in the September expiration cycle. Option prices are rich here at present as the market is expecting a strong near-term move and we intend to take advantage.
Source: Interactive Brokers
In terms of strategy, as mentioned, the naked put or covered calls are excellent candidates in a period of high implied volatility. As stated in previous commentary, we like naked puts in low-priced stocks for the simple fact that many times (because of the high volatility), we can roll out in time (if the trade goes against us) for a credit which lowers our break-even on the trade. We have no problem continuing rolling over many months as long as we are receiving a credit (lowering cost basis) on our rolls.
If one prefers the covered call approach, the only real way to reduce the cost basis (if the trade goes against the trader) is to sell call options which have multiple months to go before they expire. The front-month options simply would not have enough time premium to reduce the cost basis sufficiently enough. The advantage of the covered call though over the naked put is that the trader can also pocket a capital gain up to the strike price of that call option.
Therefore, to sum up, we like the look of AMRN from the long side. The long-term chart looks to have solid support not far from the share price and we like the bullish trends in the financials. We will put long deltas to work in here shortly.
Elevation Code’s blueprint is simple. To relentlessly be on the hunt for attractive setups through value plays, swing plays or volatility plays. Trading a wide range of strategies gives us massive diversification, which is key. We started with $100k. The portfolio will not stop until it reaches $1 million.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in AMRN over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.