The story of David and Goliath has captured imaginations for
thousands of years. But many traders who look for giant slayers
among the smallest companies are met with disappointment.
Occasionally, however, there are stories of small-cap companies
that take on giants and win, and today we have a company that
reported $39,000 in revenue during the past 12 months scoring a
Apple (Nasdaq: AAPL)
, a company with more than $150 billion in sales.
On a day when the Dow plummeted hundreds of points,
VirnetX Holding Corp. (
was up 25%, as of this writing, after a federal jury awarded the
company $368 million from Apple in a patent infringement case for
virtual private network technology.
Lawsuits regarding patents have become big business, but they
seem to be a source of legal confusion, as well, with courts
issuing conflicting opinions. Apple and Google (Nasdaq: GOOG) are
at the center of the storm and are aggressively pushing the courts
to develop a uniform policy. It seems likely that smaller companies
will either have to settle for less than the jury awards or accept
years of appeals that could drag their case to the U.S. Supreme
Apple has more than $100 billion in cash on itsbalance sheet and
needs to vigorously defend itself against the claims of smaller
companies, so it is very likely to file an appeal.
VirnetX has been volatile recently as traders took
positions in anticipation of the jury's verdict. The stock declined
50% in July, and then consolidated during the past three months. An
upside breakout from theconsolidation range seems unlikely to
In some cases, traders can overreact to good news about
asmall-cap stock and push prices up too high. When they realize the
short-term gain may be all they will see for a time, they tend to
take profits quickly.
If this happens with VirnetX, the stock would be expected
to fall back toward the middle of its trading range, which formed
mostly between about $26.92 and $23.33. The midpoint of that range,
$25.13, is the initial expected downsideprice target .
VirnetX had miniscule revenue and noearnings during the past 12
months. According to SEC filings, the company has more than 51
millionshares of stock issued and outstanding. That means the full
value of the jury award amounts to about $7.22 per share, before
attorney fees and other expenses. Without revenue and earnings, the
payments from patent lawsuits, settlements and royalties will need
to be substantial to support a stock price of more than $30 a
The rapid gains seen after the recent court decision may prove
to be irrationally exuberant, and a price decline could follow. Put
options represent the safest way toprofit from a potential
sell-off. While ashort sale is possible, insiders hold large
positions, which limit the number of shares available to borrow for
short trades. This could lead to high costs for shorts, and there
is unlimited risk if ashort squeeze develops. Aput option limits
the risk to the amount paid for theoptions contract .
Options expiring in December should allow time for traders to
react to Apple's seemingly inevitable appeal of the judgment. Puts
with astrike price of $30 are trading for about $2.23 and would be
profitable if VirnetX falls below $27.77.
If VirnetX reaches the downside target of $25.13, these
puts would have anintrinsic value of $4.87, and would deliver a
gain of at least 118%.
While VirnetX certainly received good news, it seems
to have pushed the price up too high and created a profitable
opportunity for traders.
Action to Take -->
Buy VirnetX Dec 30 Puts at $3.25 or less. Set stop-loss
at $2.25, risking $100 or less per contract. Set initial price
target at $4.87 for a potential 50%-plus gain in six weeks.
This article originally appeared on TradingAuthority.com:
The Little Stock That's Taking on Apple Could Make