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A Deal Sets Up a Possible Triple Digit Gain

A Deal Sets Up a Possible Triple Digit Gain

Deals can lead to large moves in a stock. They can also lead to small moves that carry some significance on a technical level. The chart of E*TRADE Financial Corporate Services, Inc. (Nasdaq: ETFC) shows a rally off support.

ETFC chart

News indicates why the move have been completed. Business Wire reported,

“An industry first, administrators on the E*TRADE platform can roll out Carver Edison’s technology to their participants efficiently and effectively, leveraging E*TRADE resources

E*TRADE Financial Corporate Services, Inc. today announced it is helping streamline processes for plan administrators working with Carver Edison, a provider of Cashless Participation, which allows employees to maximize their ESPP contribution with limited payroll deductions.

Stock plan administrators who use Carver Edison can now more easily offer interest-free ESPP loans without changing their workflow. Using E*TRADE’s industry-leading platform1, Equity Edge Online®, plan administrators can seamlessly reconcile, and process purchases for ESPPs with Cashless Participation.

Administrators can also access comprehensive plan reporting and participants can view their share deposits.

“Carver Edison is a great example of a cutting-edge company that shares our disruptive spirit and vision for the future of equity compensation,” said Scott Whatley, President of E*TRADE Corporate Services.

“Incorporating innovative features like these into ESPP programs can be a game-changer for participants. And while plan sponsors are always looking for ways to make these programs even more attractive, it can be challenging to implement them efficiently.

So, by working with Carver Edison, we can help plan sponsors drive greater participation in ESPPs, maximizing this valuable benefit without adding undue administrative burden.”

The announcement comes on the heels of Equity Edge Online earning the #1 rating in Loyalty and Overall Satisfaction eight years in a row by Group Five.

E*TRADE was also the highest rated among full administration plan sponsors for helping participants understand the value of their equity awards and how they can be used to help meet financial goals.

The longer term chart shows that the stock is moving off of a price level that could be an important support zone. The stock has bottomed near the current price on three occasions over the past two years. This indicates buyers may be tempted by a perceived bargain level for the stock.

ETFC weekly chart

 A Trade for Short Term Bulls

As with the ownership of any stock, buying ETFC could require a significant amount of capital and exposes the investor to standard risks of owning a stock.

To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.

Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.

To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.

This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.

bull call spread

Source: The Options Industry Council

Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.

This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.

A Specific Trade for ETFC

Every day, we scan the markets looking for trades with low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.

When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.

For ETFC, the October 11 options allow a trader to gain exposure to the stock.

An October 11 $43.50 call option can be bought for about $0.82 and the October 11 $45 call could be sold for about $0.33. This trade would cost $0.49 to open, or $49 since each contract covers 100 shares of stock.

The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.

In this trade, the maximum loss would be equal to the amount spent to open the trade, or $49.

The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.

For this trade in ETFC the maximum gain is $1.01 ($45 – $43.50= $1.50; $1.50 – $0.49 = $1.01). This represents $101 per contract since each contract covers 100 shares.

Most brokers will require minimum trading capital equal to the risk on the trade, or $49 to open this trade.

That is a potential gain of about 106% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.