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Bionano Genomics Stock: Selling Puts Instead Of Buying BNGO


Genomic Laboratory Equipment

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I first became aware of Bionano Genomics (NASDAQ:BNGO) early in 2021. A stock screen I was using for a short-term trading strategy alerted me to the stock’s price action, I bought some shares and immediately set a sell order at my profit goal. To my surprise the order was filled quickly, and I made a nice profit I was happy with. Then BNGO continued to rise, reaching “meme-stock” like gains. I wrote my article on BNGO, as I then investigated the company, not just the ticker. To summarize I felt the share price was ahead of the company’s prospects, then even further ahead as the price continued to appreciate-from under $1 where I bought to the mid-teens in the spring of 2021. Because of the (irrational) exuberance in the market in the spring of ’21, to say I was “roasted” in the comments is putting it mildly. Trust me, I’ve been chewed out by some of the best raging Skippers in the history of the Navy, so while the attacks did sting a little, the lively back and forth was entertaining at a minimum, and I did learn a bit more about the company. For those who commented, and those who are reviewing that article and the comments, I thank you. Honestly, I wasn’t bitter I missed the run-up (I’m a very conservative investor) or the comments.

Bionano Genomics is a San Diego CA based company (near where I live) that manufactures, sells and service the Saphyr optical genome mapping (OGM) system and has acquired other companies in the medical technology domain. Despite my misgivings about the stock price in 2021, I want the company to succeed for two selfish reasons. First, any successful company in San Diego benefits our local economy, far-too long reliant on the military-industrial complex. Secondly, like all people, my family and close friends have been affected by the scourge of cancer, and cheaper/quicker genome mapping allowing targeted treatment is a huge advantage.

Meme-stock like price action last year

From late 2020 into the Spring of 2021, the share price got extremely high compared to BNGO’s financial situation and revenues. In summary, the company has never been profitable, was coming off a period of massive dilution throughout 2019 and 2020, had rapidly increased SG&A costs, and was finally ramping Saphyr system sales and installation. Even with the increased adoption of Saphyr in labs worldwide, the share price went up 1500%, and comments on both SA and other chat boards were talking about share prices of $80-$100 in 2021 from a price around $1 a share at the New Year. Considering net revenue and earnings were still negative, these predictions were ludicrous. While the company continued to execute, the share price peaked in the spring of 2021 and began a slow, steady decline to the area it is currently trading in around $1.50. Additionally, the company took advantage of run-up although not as massively as their previous dilutions, and did issue more warrants-more dilutive activity.

So Why Am I Now Positive?

For me, it all boils down to execution starting to pay off: the growing fielding of Saphyr, the acquisition of Lineagen in 2020 and BioDiscovery in 2021 (skillfully using the elevated stock price for 40% of the purchase) and sales of array kits to continue growing revenue. The company is executing well-the large growth in sales and marketing staff, with the earlier disclosed costs in this area, is paying off. To their credit, BNGO management is doing their part-fielding more systems, growing recurring revenue for both those systems and genomic processing for fees, and diversifying the income stream with smart acquisitions. For example, during the most recent earnings call, Erik Holmlin stated “revenue was $5.7 million for Q1, which represents an 80% year-over-year increase” (Q1 2022 Results earnings results transcript, available on Seeking Alpha).

At the same time, the share price and valuation of the company is presently much more realistic. After the near-vertical spike to briefly above $15.50 a share, the price re-traced 2/3s of the gain quickly, held for a few months then dropped below $2 a share. As a value-oriented investor, to me “valuations matter” and as the share price dropped alongside solid if not spectacular execution, I became more interested in investing in the company longer-term unlike my quick trade a year and a half ago.

The share price continued to fall as the overall market declined as well. the share price is currently trending around $1.45-$1.60 a share. This is up from where I traded the stock briefly in 2020 but much more in line with fundamental realities-the company is still yet to turn a profit, has some remaining dilutive overhang and still negative margins, but seems to be progressing toward turning the corner. The Saphyr installed base continues to grow, reaching 176 units in Q1 2022, a 64% growth year-over-year per the above referenced call. Sales of assay flow cells, a positive, recurring revenue stream for Bionano, also grew, totaling 3,225 flow cells, a growth of 24%. To me this is the most positive aspect, as I compare this to “giving away the razor” to sell razor blades. With the installed base of Saphyr systems more than doubling since I first found Bionano Genomics due to a stock screen, their future revenues are much more in-line with current share price and likely appreciation instead of the “to the moon” euphoria of last year.

I’d like to point you to a good overview by Busted IPO Forum here, which updated their well-analyzed thesis in November. I share some of their “wait and see” caution, but am dipping my toes into the water, so to speak. And getting paid to do so.

“How?” you may ask

By selling slightly out of the money puts instead of buying shares out right.

I have been a longtime seller of covered calls and recently begun expanding my use of options. By selling $2 cash secured puts I have been able to earn an immediate premium gain. Yes, this “holds” a reduced amount of capital-the remaining price of the stock minus the put premium-but that amount would otherwise be at risk in the share price. As Bionano Genomics moves sideways below the strike price, I make the decision to either roll out the put’s expiration date or let the stock be “put” to me.

There are realistically three outcomes, and two of the three outcomes work out positively.

1) I let stock get assigned to my puts, owning shares at $2 per share minus net collected premium. Right now, since I’ve collected roughly $.50 per share in premiums from selling and rolling these puts, I’d own shares at a discount to recent trading prices, and this discount increases if the if the share price rises closer to $2 strike. Additionally every time I roll out the expiration, this cost basis gets further reduced. (Not the article to fully develop this, but selling puts to “buy” shares, or selling covered calls on owned shares is a longstanding strategy to reduce cost basis.)

2) I continue to roll puts expiration out, collecting more premium and lowering cost basis if ever “put” the stock. This allows more gain and likely profit on the same held capital, especially useful and profitable if share price moves sideways for an extended period of time.

3) If the stock jumps above $2, my puts expire worthless. I miss capital gains but have premiums and unlocked capital for other trades. While the gain should be calculated on held capital to be fair, it is a nearly 25% return. Of course, I would miss out on any further appreciation, much like I did when the “rocket ship” appreciation happened in 2021. Like that trade, I am content collecting call premium, having recently created a small TastyWorks account for just that strategy.

Two Risks To Be Aware Of

There are two risks-and yes, this hearkens back to my bearish article and sometimes bearish nature.

First, Saphyr is still a research only system, and market saturation could occur at some point. With the number of shares outstanding, there may be a realistic cap on share price appreciation, especially as credit and liquidity have gotten tighter and could remain so. Without speculating about take-overs, “to the moon” “stonk” appreciation or other market dislocations we recently witnessed, even the 50-60% appreciation BNGOs share price has made in the past 18 months (even if down substantial from the peak) may be a realistic market cap for the near-term. If Saphyr falls out of favor, or a competitor supplants the ongoing adoption of the system, BNGO could continue to be valued poorly, and even risk delisting as they did a few years ago.

The second risk is not unique to Bionano Genomics, although it definitely applies. By selling puts, I am contractually bound to buy shares in the company. The only way to avoid this is buy the puts back-potentially at a loss-or roll the puts out to a later expiration. While I currently have collecting more in premium than the difference between the share price and the $2 strike price, if Bionano’s share price dropped rapidly a small paper gain could turn into a significant loss. With the wider adoption of the Saphyr system, it is unlikely the share price would go to zero, but as a put seller I could end up with shares at a purchase price well above the current, or a future, market price. One way to balance this risk is the modest total value of capital I would have “at risk” if BNGO shares are “put” to me below market price. While learning and developing as an options trader, the advice of others is also my advice: any one underlying stock/ETF and option position should be a small (ideally <3%, preferably even 1%) of your capital. In my riskiest account where this position is, it’s about 3%, and that account is a small portion of our financial worth.

I feel, for me, a small foray back into Bionano Genomics selling puts is a good strategy to take advantage of low strike options, the company’s much more realistic valuations and continued execution. Even if the stock is put to me, the small amount of capital at risk and potential for future appreciation makes me more positive if not truly bullish on Bionano Genomics.

Best wishes for investment success!

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