A Possible 234% Gain In a Supply Chain Developer
Trade summary: A bull call spread in Manhattan Associates, Inc. (Nasdaq: MANH) using the May $60 call option which can be bought for about $2.77 and the May 15 $65 call could be sold for about $1.62. This trade would cost $1.15 to open, or $115 since each contract covers 100 shares of stock.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $1.15. The maximum gain is $385 per contract. That is a potential gain of about 234% based on the amount risked in the trade.
Now, let’s look at the details.
Manhattan Associates develops supply chain commerce solutions. The Company operates through three geographical segments: the Americas, Europe, Middle East and Africa (EMEA), and the Asia Pacific (APAC).
It is engaged in developing, selling, deploying, servicing and maintaining software solutions designed to manage supply chains, inventory and omni-channel operations for retailers, wholesalers, manufacturers, logistics providers and other organizations.
Its solutions consist of software, services and hardware, which coordinate people, workflows, assets, events and tasks across the functions linked in a supply chain from planning through execution. Its supply chain solutions consist of three components: Distribution Management, Transportation Management and Visibility.
GlobeNewswire recently reports that MANH reported record first quarter revenue of $153.9 million for the quarter ended March 31, 2020, applying the new revenue recognition standard retrospectively.
The stock was up on the news.
GAAP diluted earnings per share for Q1 2020 was $0.35 compared to $0.32 in Q1 2019. Non-GAAP adjusted diluted earnings per share for Q1 2020 was $0.40 compared to $0.41 in Q1 2019.
“Q1 was a solid quarter for Manhattan Associates, especially in light of the impact the COVID-19 pandemic is having globally,” said Manhattan Associates president and CEO Eddie Capel.
“Our growing cloud business outperformed, with noticeable revenue growth and continued strength in overall bookings.”
He also addressed potential risks, noting “We are seeing some shifts in the expected timing of deal closings from Q2 to the second half of the year and delays of some of our services projects.
But in general, we are not seeing cancelations and are seeing a larger pipeline of opportunities for the balance of the year versus a quarter ago.
During this period of greater uncertainty, we are focusing first and foremost on the health and safety of our employees, while continuing to best serve our customers in a virtual environment.
At the same time, we are taking appropriate actions, such as previously announced expense management strategies, that we believe will allow us to manage through this volatile period while ensuring we are best-positioned to capitalize on the market opportunities when we return to a more normal operating environment.”
The weekly chart shows strong momentum and significant upside potential.
The stock faces resistance at about $70, providing strong gains especially using leverage with an options strategy that limits risk.
A Specific Trade for MANH
For MANH, the May 15 options allow a trader to gain exposure to the stock. This trade will be open for about six weeks and allows for traders to turn over capital quickly, potentially compounding gains several times a year.
A May 15 $60 call option can be bought for about $2.77 and the May 15 $65 call could be sold for about $1.62. This trade would cost $1.15 to open, or $115 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 $1.15.
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 MANH the maximum gain is $3.85 ($65- $60= $5; 5- $1.15 = $3.85). This represents $385 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $115 to open this trade.
That is a potential gain of about 234% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.
A Trade for Short Term Bulls
As with the ownership of any stock, buying MANH 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 MANH 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.