Investing with options: Novo Nordisk earnings

Strategies

• Execution: BuyToOpen 1 21-Jun-2024 87.50 Call @ $16.90 (Delta: 0.7376)
• Premium and risk: Per share: $16.90 (debit)
  • Premium cost: $16.90 x 100 = $1,690
  • Max risk: $1,690 (if NVO remains below 87.50 at expiry)
• Breakeven point: $87.50 (strike) + $16.90 (premium) = $104.40
• Rationale: Opting for a long call with a distant expiration reduces time decay and captures more upside with a high delta.
• Stock vs options comparison: $1,690 could buy approximately 17 shares of NVO at its current price of $96.40. A $1 increase yields an estimated profit of $17 for the stock but a $73.76 gain for the option (100 x $1 x 0.7376).

2. Bullish outlook - selling ITM put options:

• Execution: SellToOpen 1 03-Nov-2023 100 Put @ $4.50 (Delta: -0.6474)
• Premium and risk: Per share: $4.50 (credit)
  • Premium earned: $4.50 x 100 = $450
  • Max risk: Considerable if NVO falls sharply.
• Breakeven point: $100 (strike) - $4.50 (premium) = $95.50
• Rationale: A near-term expiration date accelerates time decay, making the trade more profitable if NVO remains above the strike price.
• Stock vs options comparison: Effective price: $95.50 vs current price: $96.40. Discount: $0.90 per share. Percentage Discount: 0.93%.

3. Bearish outlook - buying put options:

• Execution: BuyToOpen 1 21-Jun-2024 105 Put @ $13.80 (Delta: -0.5353)
• Premium and risk: Per share: $13.80 (debit)
  • Premium cost: $13.80 x 100 = $1,380
  • Max risk: $1,380 (if NVO stays above 105 at expiry)
• Breakeven point: $105 (strike) - $13.80 (premium) = $91.20
• Rationale: This long-put strategy minimizes time decay while providing a leveraged position for significant gains if the stock price falls.
• Stock vs options comparison: A $1 decrease in NVO stock yields an estimated $53.53 profit per option contract (100 x $1 x -0.5353).

4. Neutral/bullish outlook - writing covered calls:

• Execution: SellToOpen 1 10-Nov-2023 105 Call @ $0.55 (Delta: 0.1786)
• Premium and risk: Per share: $0.55 (credit)
  • Premium earned: $0.55 x 100 = $55
  • Max risk: Capped at the stock's current market price of $96.40 x 100 = $9,640.
• Breakeven point: Varies based on stock cost basis
• Yield:
  • 11-Day Yield: ($55 / $9,640) x 100 = 0.57%
  • Annualized Yield: (0.57% x 365) / 11 = 19.05%
• Rationale: Writing a covered call provides additional income while capping the upside potential.
• Stock vs options comparison: The covered call secures immediate premium income with a capped upside potential, providing a 19.05% annualized yield if repeated.

Conclusion

• Buying calls: The leverage effect of a call option allows you to control the same amount of stock with less capital. A $1 increase in Novo Nordisk's stock results in an $73.766 gain with a call, compared to a $17 gain by holding 17 shares of the stock for the same amount of capital.
• Selling ITM puts: This strategy could allow you to acquire Novo Nordisk at a discounted rate compared to buying shares directly. The effective purchase price would be the strike minus the premium received, which can be calculated as a percentage discount against the current stock price.
• Buying puts: Options offer a leveraged way to bet against the stock with a defined risk, which can be particularly useful in volatile times.
• Writing covered calls: This strategy provides additional income and an annualized yield of 19.05%, which you can't get by just holding the stock.

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