Mazor Robotics Ltd. (NASDAQ:MZOR) was a stock on the move until the middle of March when it caught a nasty downgrade that started a 25% correction. Luckily the drop came from an all-time high so it’s still up about 20% in the past 12 months.
This morning the MZOR management reported earnings and they beat the top and bottom lines. Yet investor sold the stock hard on the headline. It is now off the morning lows, nevertheless, the bulls have more work to do.
Fundamentally, MZOR stock is not a cheap stock from the traditional price-to-earnings ratio perspective. But it’s a quality company that competes against few foes. So as long as they continue to execute on plans without major mistakes, most competitors in the arena should prosper.
Year-to-date Mazor Robotics stock was up 10% but lagging slightly behind Intuitive Surgical, Inc. (NASDAQ:ISRG), which was up 25%. But over a longer period of time MZOR is a shooting star stock.
Momentum stocks like this make it hard for investors to trade. On the way up they seem perpetually waiting for a pullback; on the way down they look like falling knives too dangerous to catch. So most investors opt out of trading them completely.
To mitigate this risk, I use options in order to trade fast moving stocks like Mazor. There, I can build buffer zones between current price and my levels of risk. I don’t like to buy shares in the open market and leave absolutely no room for error. Markets, in general, are near all-time highs with a slew of potential negative headlines looming. Should the stock market correct, momentum stocks like MZOR fall faster.
The stock has been consolidating above $52 per share since last October. Such pivot levels often become strong support for forward rallies. Furthermore, there is another band of strong support below $48 per share. So the bulls have the advantage in a rising stock market and therein lies my opportunity.
I want to bet that support in MZOR stock will hold for 2018 and beyond and I can create income from what others’ unfounded fears. I consider this a speculative trade in a conservative portfolio so caution is warranted.
The Bet: Sell MZOR Aug $40 put for $1.50. This is a bullish trade, which does not require a rally to profit. Here I have an 80% theoretical chance of success. But I would accrue losses below $38.50.
Selling naked puts carries big risk especially for a stock as frothy as MZOR. For those who want to mitigate it, they can sell a spread instead.
The Alternate Bet: Sell MZOR Aug $40/$35 credit put spread. The spread has the same odds but would deliver 18% yield on risk.
It is important to note that today’s trade doesn’t need a rally to profit. I simply need support for MZOR stock to hold for the near term. Time will then do the heavy lifting and premiums will expire in my favor. But just in case, I have to be ready to own the shares at that level.
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Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.
