A Latin American Rebound Could Boost This Stock
Stocks are volatile all around the world and this is especially true in countries with recent elections. Among the most recent elections was Brazil.
Bloomberg notes, “In Brazil, a brutal recession swelled the ranks of the unemployed to more than 12 million last year. Murders soared to almost 64,000. Adding to Brazilians’ outrage has been the seemingly endless flow of news documenting the vast sums of wealth that politicians accumulated abroad from the sprawling kickback scheme known as Carwash.
In the first round of presidential elections, this anger translated into an embrace of two of the more radical candidates: one on the far right and one on the far left.”
That first round of elections seemed to have sparked excitement in the stock market as the chart below shows.
iShares MSCI Brazil Index Fund (NYSE: EWZ) appears to be completing a double bottom pattern and targets a price gain of about 25% based on that pattern. Using individual stocks or options on stocks, traders could do even better than that.
News From a Financial Services Company Could Set Up a Triple Digit Gain
Business Wire reported that PagSeguro Digital Ltd. (NYSE: PAGS) will launch its new device, Moderninha Smart, a modern, portable and fully integrated AndroidTM based point-of-sale that works seamlessly with any business.
Moderninha Smart offers a full integration of hardware, PAGS’ Apps and its fast and secure payments network. By combining all the high-end functionalities such as Wi-Fi, Bluetooth and 4G connections, as well NFC and QR Code acceptance, Moderninha Smart offers a robust managed payment experience.
Moderninha Smart was built for simplicity and ease of use, it requires no setup and integrates features like product catalog, inventory management, installment calculator, bank slips (boleto) issuing and payment links. The integration of software and hardware helps merchants to be more productive and serve clients better.
PAGS point-of-sale software also gives merchants the ability to run their business efficiently by managing their PAGS’s account, including bill payment, mobile top-up, balance transfer among other functionalities available in our ecosystem.
Moderninha Smart has a five-year warranty and is priced at 12x of R$69.90 or R$838.80. Merchants can accept all card schemes.
PAGS will launch a new country-wide online and offline advertising campaign to promote this new technology.
The news pushed the stock to the top of its trading range on the daily chart.
The weekly chart shows a similar pattern and confirms the stock offers significant up side potential.
A Trade for Short Term Bulls
As with the ownership of any stock, buying PAGS 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 PAGS
For PAGS, the November 16 options allow a trader to gain exposure to the stock.
A November 16 $32.50 call option can be bought for about $1.60 and the November 16 $35 call could be sold for about $0.92. This trade would cost $0.68 to open, or $68 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 $68.
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 PAGS the maximum gain is $1.82 ($35 – $32.50 = $2.50; $2.50 – $0.68 = $1.82). This represents $182 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $68 to open this trade.
That is a potential gain of about 267% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.
In this trade, options provide income and defined risk. These are the type of strategies that are explained and used in TradingTips.com’s Extreme Profits Calendar service. This service uses seasonals as one indicator in its trade selection process. To learn more about how options can be used to meet your goals, click here for details on Extreme Profits Calendar.