Buying the Dips in 2 Diagnostic Names After 'Significant Overreactions'
Here's why and how I am adding to both stocks in this space.
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Today I am offering a "twofer" of covered call trade ideas. Both of these ideas involve a biopharma whose stock took a hit last week on concerns around Centers for Medicare & Medicaid Services, or CMS policies.
The declines in the stocks seem to be significant overreactions. I like using covered call orders to add to positions in these types of scenarios. Why? The rise in volatility when this happens typically temporarily boosts the premiums in the options against the equity. That pushes up potential returns and downside protection.
CareDx
Shares of CareDx, Inc. CDNA fell around 40% this past week. CareDx provides diagnostic solutions for transplant patients and has several products on the market.
The trigger for the decline was a draft of a Local Coverage Determination, or LCD, related to organ transplants. Specifically related to molecular testing for solid organ allograft rejection. The fears were this could potentially lower the Medicare reimbursement for some of the company’s diagnostic tests.
However, late in the week, the CEO of CareDx came out and stated there should be no change based on this draft around Medicare coverage as it relates to CareDx.
A healthcare research firm called Nephron Research upgraded CDNA shares to a "Buy" with a $28 price target on the dip in the stock, which ended the week just below the $12 level. I agree with that assessment, and this is how I boosted my stake in CDNA late in the week:
CDNA Option Strategy
This is how one can initiate a holding in CDNA with a covered call order. As a reminder, covered-call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.
Using the February $12.50 call strikes, fashion a covered call order with a net debit in the $9.20 to $9.40 a share range (net stock price - option premium). This strategy provides downside protection of over 20% with nearly 25% of upside potential if the stock trades slightly up over the option duration.
Lantheus Holdings
Up next is Lantheus Holdings LNTH, a diagnostic radiopharmaceutical concern whose stock fell about 15% this past week. The decline was triggered with news that the CMS is seeking to maintain current policies around reimbursement for diagnostic radiopharmaceuticals. The market was obviously hoping for a slightly more generous reimbursing regime.
On the decline, Goldman Sachs reiterated its "Buy" rating on LNTH and $140 price target. TD Cowen did the same with a $110 price target. The stock ended the week right around the $70 level.
Lantheus is expected to make a bit over $6.50 per share in earnings in 2025. The company has a rock-solid balance sheet and is producing significant free cash flow as well.
This is how I added to my stake in this stock late in the week:
LNTH Option Strategy
This is how one can initiate a holding in LNTH with a covered call order.
Using the January $70 call strikes, fashion a covered call order with a net debit in the $59.75 to $60.25 a share range (net stock price - option premium).
This strategy provides downside protection of 15% with upside potential of just over 16% if the stock trades flat over the option duration.
At the time of publication, Jensen was long CDNA and LNTH.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider CDNA to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
