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A Merger Highlights a Trading Opportunity

A Merger Highlights a Trading Opportunity

HealthEquity, Inc. (NASDAQ: HQY), an independent health savings account (HSA) nonbank custodian, and WageWorks, Inc., (NYSE: WAGE), a leader in administering HSAs and complementary consumer-directed benefits (CDBs), recently announced a deal.

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  • Globe Newswire reported, that the two companies entered into a definitive agreement under which HealthEquity will acquire all of the issued and outstanding shares of common stock of WageWorks for $51.35 per share in cash, representing a total enterprise value of approximately $2 billion.

    The all-cash offer represents a 28% premium to the volume weighted average closing price of WageWorks shares for the 30 trading days prior to HealthEquity’s acquisition proposal becoming public.

    The acquisition is expected to give HealthEquity access to more of the fast-growing HSA market by expanding its direct distribution to employers and benefits advisors as a single source, premier provider of HSAs and complementary CDBs.

    Products will include flexible spending accounts, health reimbursement arrangements, COBRA administration and commuter accounts.

    Its focus on member engagement and remarkable service enables HealthEquity to more fully meet the needs of employers, partners and a broader range of consumers along the continuum of health savings.

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  • Jon Kessler, President and CEO of HealthEquity, commented on the acquisition,

    “Acquiring WageWorks positions us to accelerate the market-wide transition to HSAs, with greater market access and an end-to-end proprietary platform built to drive members to spend smarter while saving for healthcare in retirement.

    Together, we can meet employers and employees wherever they are on their journeys to connect health and wealth, while simultaneously accelerating our growth in an expanding industry.

    This transaction is compelling for team members and stockholders of both companies and it accelerates the strategic goals of both companies immediately by adding WageWorks’ market-leading CDB services to HealthEquity’s highly acclaimed HSA platform.”

    Edgar Montes, President and CEO of WageWorks, noted: “The combination of WageWorks and HealthEquity will be transformative in our industry and will amplify our impact among clients, brokers and policymakers.

    Together with HealthEquity, WageWorks can bring broader, deeper, more innovative solutions to our customers – giving them greater choice and peace of mind. This transaction recognizes and reflects our strong brand and reputation in the market.”

    The news could help the stock establish a bottom.

    HQY daily chart

    Recent price action indicates the stock may be competing a retracement of a large gain that ended in 2018.

    HQY weekly chart

    A Trade for Short Term Bulls

    As with the ownership of any stock, buying HQY 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 HQY

     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 HQY, the August 16 options allow a trader to gain exposure to the stock.

    An August 16 $65 call option can be bought for about $3.10 and the August 16 $70 call could be sold for about $1.22. This trade would cost $188 to open, or $188 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 $188.

    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 HQY the maximum gain is $3.12 ($70 – $65= $5; $5 – $1.88 = $3.12). This represents $312 per contract since each contract covers 100 shares.

    Most brokers will require minimum trading capital equal to the risk on the trade, or $188 to open this trade.

    That is a potential gain of about 65% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.

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