A Key Personnel Change Could Be a Negative for This Company
Personnel changes have been in the news lately as analysts noted high level departures from Tesla. That company recently lost key executives including those who worked with government regulators, oversaw Tesla’s Autopilot driver-assistance system, a sales chief and a senior vice president of engineering among others.
Those challenges are one reason the stock has been volatile recently. But, other companies are also seeing important changes in the C-suite.
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PR Newswire recently reported on a change at Etsy, Inc. (Nasdaq: ETSY), the global marketplace for unique and creative goods.
Chief Operating Officer Linda Findley Kozlowski decided to leave the company to pursue other opportunities. She will leave at the end of 2018, spending the next few months working with Etsy’s leadership team to ensure a seamless transition.
Etsy CEO Josh Silverman commented, “Linda’s contributions will leave a lasting mark on Etsy and its community. She has been instrumental in enabling Etsy to expand our global base of buyers, improve the shopping experience, and launch new products that make it easier for sellers to succeed.
We wish her all the best in her future endeavors. We have a strong bench of talent, and I plan to devote more time to working directly with our product teams so that we can execute on our roadmap and drive growth.”
The departure certainly sounds rather benign, so far. Linda added, “My conviction that Etsy serves a special place in the world is even stronger today than it was when I joined the company two and a half years ago.
Our marketplace creates economic opportunity for two million sellers and allows buyers to discover unique items for the moments in life that deserve a human touch. I have no doubt that the team will continue to deliver on Etsy’s mission of keeping commerce human.”
Etsy does not currently intend to refill the COO role following the departure. But, the stock sold off on the news.
The question for traders now is whether the sell off represents the end of the up trend that can be seen in the long term chart below.
The stock is rich based on expected earnings. Analysts expect the company to report earnings per share (EPS) of about $0.44 this year, $0.66 next year and $1.02 in 2020. Five analysts have posted estimates for 2020.
Based on expected EPS, the stock is priced at 50 times 2020 EPS. The company missed expectations last quarter, so it is not certain the company will meet estimates in the future. The loss of key personnel like the COO could make it even more difficult to meet expectations.
A Trading Strategy to Benefit from Weakness
A price decline often results in higher than average options premiums. That means option buyers will be forced to pay higher than average prices for trades, But, sellers could benefit from the higher premiums.
In this case, with a bearish outlook for the short term, a call option should be sold. The call should decline in value if the stock declines and sellers of calls benefit from this decline.
Selling options can involve a great deal of risk. A spread options strategy can be used to limit the potential risk of the trade.
One strategy that traders can consider is the bear call spread. This is a trade that uses two calls with the same expiration date but different exercise prices.
Traders buy one call and sell another call. The exercise price of the call you sell will be below the exercise price of the long call. The call is sold to limit the risk of the trade. So, this strategy will always generate a credit when it is opened and will always have limited risk.
The risk profile of this trading strategy is summarized in the diagram below which shows the limited risk and reward.
Source: The Options Industry Council
While risks and rewards are limited, this strategy will allow traders to generate potential gains in a stock they might otherwise find too risky to trade. Many individuals ignore bearish strategies because of the risks.
You’ll know the maximum potential gain with this strategy as soon as it’s opened. It is equal to the amount of premium received when the trade is opened. The maximum loss is equal to the difference between the exercise price of the options contracts less the premium received and is also known.
A Bear Call Spread in ETSY
For ETSY, we could sell a September 21 $50 call for about $0.95 and buy a September 21 $55 call for about $0.23. This trade generates a credit of $0.72, which is the difference in the amount of premium for the call that is sold and the call.
Remember that each contract covers 100 shares, opening this position results in immediate income of $72. The credit received when the trade is opened, $72 in this case, is also the maximum potential profit on the trade.
The maximum risk on the trade is about $428. The risk can be found by subtracting the difference in the strike prices ($500 or $5.00 times 100 since each contract covers 100 shares) and then subtracting the premium received ($72).
This trade offers a potential return of about 17% of the amount risked for a holding period that is about five weeks. This is a significant return on the amount of money at risk. This trade delivers the maximum gain if ETSY is below $50 when the options expire, a likely event given the stock’s trend.
Call spreads can be used to generate high returns on small amounts of capital several times a year, offering larger percentage gains for small investors willing to accept the risks of this strategy. Those risks, in dollar terms, are relatively small, about $428 for this trade in ETSY.
These are the type of strategies that are explained and used in our TradingTips.com’s Options Insider service. To learn more about how options can be used to meet your income and wealth building goals, click here for details on Options Insider.