This week, we have volatility on our side. Milk it for all it’s worth. Here’s your play to make….
Market volatility brought on by the brief correction that we just saw (and could continue) dramatically boosts the premiums you’ll find when looking at option chains and what you can get by selling calls.
And right now, some premiums are ridiculous—if you’re willing to be patient and use limit orders to bring home that cash.
One of my favorite companies — and now a stock I think is undervalued — is Cepheid (CPHD).
Cepheid is a world leader in tests or diseases such as C. difficile, MRSA and tuberculosis. Over the last 20 years, we’ve watched this company grow from a baby to an outfit that should record more than half a billion in sales in 2015.
Fun fact: The World Health Organization says Cepheid’s TB test is the only one worth using, as it identifies what strain of TB is in the patient’s simplifying treatment.
The company uses a razor and blade business model, with increasing amounts of revenue from tests sold into more and more hospitals and clinics and other facilities using their GeneXpert system.
CPHD is not consistently profitable, and traditional valuation metrics make this a very expensive stock—but the Street often pays top dollar for growth companies with great technology and market leadership, and that is Cepheid.
If you agree, and see a stock at $32.50, check out the February 35 calls.
There are wide spreads, from $.75-$1.50 or so, but even at $.75, that’s a great premium.
Own the shares and make this trade 12 times a year and you generate, at the very minimum, $9.00 in cash…
… and always, always collect that cash. This is your prime directive in markets like this!
We’re talking a more than 25% return on capital, even if the stock doesn’t move.
If the stock pops and breaks $35, and you get called out, you will have netted roughly $3.25 in a month. That’s 10% in a month!
Think about it…
(Michael Shulman currently does not own CPHD shares.)
This post originally appeared in mainstreetinvestor.com.
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