A Laser Maker Sets Up a Triple Digit Trading Opportunity
Coherent, Inc. (Nasdaq: COHR), one of the world’s leading providers of lasers, laser-based technologies and laser-based system solutions in a broad range of scientific, commercial and industrial applications, recently announced financial results for its second fiscal quarter ended March 30, 2019.
PR Newswire reported that the company announced net sales of $372.9 million and net income, on a U.S. generally accepted accounting principles (GAAP) basis, of $20.8 million, or $0.85 per diluted share.
These results compare to net sales of $481.1 million and net income of $65.3 million, or $2.61 per diluted share, for the second quarter of fiscal 2018 and net sales of $383.1 million and net income of $35.6 million, or $1.45 per diluted share, for the first quarter of fiscal 2019.
The stock gained on the news.
Non-GAAP net income for the second quarter of fiscal 2019 was $39.2 million, or $1.61 per diluted share. Non-GAAP net income for the second quarter of fiscal 2018 was $84.3 million, or $3.37 per diluted share.
Non-GAAP net income for the first quarter of fiscal 2019 was $51.1 million, or $2.09 per diluted share.
John Ambroseo, Coherent’s President and Chief Executive Officer, added some detail to the report, noting, “Overall demand mirrored the behavior of global end markets. In the display space, revenue was consistent with our previous commentary that 2019 would be a down year for capital investment.
Very recent conversations with panel manufacturers indicate a number of new fabs are scheduled to come online starting in 2020. Orders in materials processing improved sequentially and customer sentiment at the recent Shanghai show was upbeat.
While encouraging, it seems too early to declare an imminent bounce back particularly given the unresolved trade issues between the U.S. and China as well as a weakening PMI in the Eurozone. Our OEM component business is robust and headed for a record-setting year.”
He concluded that, “Growth is especially strong in the aerospace and defense market where our U.S. manufacturing base and product portfolio are highly valued.”
The stock has recently been in a trading range and the news could deliver a catalyst that breaks the stock out of the range.
A Trade for Short Term Bulls
As with the ownership of any stock, buying COHR 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.
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 COHR
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 COHR, the May 17 options allow a trader to gain exposure to the stock.
A May 17 $155 call option can be bought for about $3.20 and the May 17 $160 call could be sold for about $1.58. This trade would cost $1.62 to open, or $162 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 $162
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 COHR the maximum gain is $3.38 ($160 – $155 = $5; $5 – $1.62 = $3.38). This represents $338 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $162 to open this trade.
That is a potential gain of about 108% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.