If you like high income, you may want to consider the trade described in this report. It covers an attractive small cap healthcare company with very high sales growth and trading at a compelling price. But rather than purchasing the shares at the current price, this trade gives you a chance to pick them up at a lower price and it also generates high upfront premium income that you get to keep no matter what. We believe this trade is attractive to place today and tomorrow (the company announces earnings after the close tomorrow), as long as the underlying share price doesn’t move too dramatically before then.
Overview: Accolade (ACCD)
Share Price (ACCD):
The company we are covering is Accolade (ACCD)—a provider of technology-enabled solutions that help people understand, navigate, and utilize the healthcare system and their workplace benefits in the United States. Accolade’s primary customers are employers that deploy Accolade’s offerings to increase their employee satisfaction levels via better healthcare benefits as well as lower claim costs. The company is quite attractive, and we recommend you take a closer look at our recent full report on the company here.
The Trade:
Sell Put Options on ACCD with a strike price of $45 (~5.3% out of the money, it currently trades at ~$47.50), and an expiration date of May 21, 2021, and for a premium of at least $0.80 (or $80 because options contracts trade in lots of 100). This comes out to approximately 1.77% of extra income in just 17 days—which may not sound like a big return—but it is a lot for such a short time frame (it’s approximately 38.2% of extra income on an annualized basis, calculated as ($0.80/$45) x (365/17) days). And this trade not only generates attractive upfront premium income for us now, but it gives us a chance at buying shares of this attractive long-term company at a dramatically lower price ($45.00—the strike price) if the market price falls below $45.00 and the shares get put to us before this option contract expires in 17 days. And we get to keep the upfront premium income no matter what.
Also important to note, you can adjust the strike price of this trade (for example to $40) or the expiration date (for example to April 16th) depending on how badly (and at what price) you want the shares put to you, and to generate a different amount upfront income as shown in the table above).
Your Opportunity:
We believe this is an attractive trade to place today and tomorrow, as long as the price of ACCD doesn't move too dramatically before then and you’re able to generate enough premium income to your liking. Important to note, the company is expected to announce earnings after the close on Wednesday (more on this in a later)
Our Thesis:
Our thesis on this trade is simply that Accolade is an extremely attractive long-term business (as we have described in our full report), and this options trade generates very high upfront premium income (that you get to keep no matter what), plus it gives you a chance to pick up shares at an even lower price. Further, market conditions are currently attractive for this trade. Specifically, premium income is higher when uncertainty and fear (volatility) are higher—which they currently are right now. Specifically, the shares have sold off a bit in recent trading sessions (this creates some short-term fear) and the company announces earnings after the close on Wednesday (this uncertainty also increases the premium income available). What does not change is the long-term attractiveness of this business.
Important Trade Considerations:
Two important considerations when selling put options are ex-dividend dates and earnings announcements because they can both impact your trade. In ACCD’s case, dividends are not a concern—because it doesn’t pay a dividend. However, ACCD does announce quarterly earnings after the market closes tomorrow (Wed 3/5), and this adds to uncertainty but it also is a big part of the reason the upfront premium income for the trade is higher and attractive. We are comfortable with this earnings risk, and we like this trade.
Conclusion:
In a nutshell, Accolade is an attractive business, trading at an attractive price. In fact, we are not totally opposed to simply buying some shares outright on this recent share price pullback (over the last two months). However, if you are sensitive to price moves, you may instead want to consider this options trade which is particularly compelling based on current market conditions. Not only does it put significant upfront income in your pocket (that you get to keep no matter what), but it also gives you a chance to pick up these attractive shares at an even lower price.