Not every trade is for every person. But if you have an appetite for risk, Jim Cramer has a stock that you might want to check out.
So far, the stock's performance has been nothing short of stellar. Over the past 5 years shares have surged more than 400%.
The stock is VirnetX - TICKER:VHC
And Cramer thinks there's potentially more upside, however he added with the big reward comes big risk.
What must you know?
VirtnetX is a bet on intellectual property.
"The company has a host of patents for technology that enables secure communications over the Internet—these patents cover everything from video chat, like you might see with Skype or Apple's FaceTime, to voice over internet protocol phones, to interactive video conferencing," explained Cramer.
"The patents were originally created at Standards Applications International, SAIC, a defense contractor which subsequently spun this part of the business off as VirnetX. And, as it turns out, these patents are central to the technology behind 4G wireless connectivity."
"VirnetX makes its money by licensing its patents to technology companies."
That might not sound like much of a business model, but remember, in the world of technology, intellectual property is everything.
"The potential upside is huge – not because of the license fees the company stands to collect - but for another reason - pending patent infringement lawsuits that it could win. "That's where the big money is," said Cramer.
VirnetX is going after Apple in court. Back on November 6th, a Federal jury in Texas ruled in favor of VirtnetX and ordered Apple to pay them 368 million for past patent infringement.
Next week, on December 20th, we'll get the post-trial judgment from a judge that could either increase or decrease the damages and we'll also get more details on the payment from Apple, like whether they'll sign a licensing agreement for future sales.
In March the company is scheduled to go to trial against Cisco, Avaya, and Siemens. Ordinarily Cramer wouldn't bet on this sort of thing, but VirnetX has racked up an impressive track record in litigation against other big players, so he thinks the smart money is on them winning.
However, Cramer also noted, "If VirnetX loses these cases, the stock will get crushed. That means this is basically reasoned gambling."
Still interested? If so here's how Cramer suggested playing it?
"With VirnetX, I suggest buying the June 26 call options for $12. That way you're effectively creating the stock at $38, or four and a half bucks above where it is right now. These options give you enough time to get a court decision. If VirnetX wins, the stock should go a lot higher than $38. And if they lose, you're not going to go to zero because of the possibility of an appeal. We don't want to take the risk of a total loss that sends the stock down below $20."
"Alternatively, if you knew that we were going to get a verdict by the third week in March, you could buy the March 30 calls for $8, creating the stock at $38 again with much less capital risk—because you'd be putting less money to work—but more time risk, because once the options expire in the third week of March, they're worth zilch."
Or you can just own the stock outright and set stops accordingly.
What's the bottom line?
However you choose to game it, remember, this is a spec play.
"VirnetX is an intriguing speculative stock with a potentially bright future, but because that future is dependent on litigation, it's also very, very risky," said Cramer.
Read More: Hidden Risk at VirnetX?
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