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A Possible Deal Creates a Triple Digit Trading Opportunity

A Possible Deal Creates a Triple Digit Trading Opportunity

CyrusOne Inc. (Nasdaq: CONE) is a real estate investment trust. The company is an owner, operator and developer of enterprise-class, carrier-neutral, multi-tenant data center properties. The company’s data centers are generally purpose-built facilities with redundant power and cooling.

The CyrusOne National IX Platform (the National IX Platform) delivers interconnection across states and between metro-enabled sites within its footprint and beyond. The Company has data centers in the United States, London and Singapore.

The Street recently reported that CyrusOne jumped on a report that the company is exploring a sale.

CyrusOne (CONE) shares are rising more than 8% Friday after Bloomberg reported that the company is exploring a sale after receiving takeover interest from at least one potential suitor.

CONE daily chart

The report noted that “the Dallas real estate investment trust specializing in data centers is working with an adviser to evaluate strategic options after it received takeover interest, sources told the news service.

One of Bloomberg’s sources said that a group including KKR & Co. Stonepeak Infrastructure and I Squared Capital is mulling whether to bid for the company.

CyrusOne’s network of 48 data centers serves about 1,000 clients in the U.S., the U.K., Singapore and Germany.

The company’s stock is up 33% year to date and 7% over the past 12 months.” These gains can be seen in the chart below.

CONE weekly chart

This news comes after the company reported, according to Zacks, that “quarterly funds from operations (FFO) of $0.90 per share, beating the Zacks Consensus Estimate of $0.81 per share. This compares to FFO of $0.81 per share a year ago. These figures are adjusted for non-recurring items.

This quarterly report represents an FFO surprise of 11.11%. A quarter ago, it was expected that this data center operator would post FFO of $0.77 per share when it actually produced FFO of $0.82, delivering a surprise of 6.49%.

Over the last four quarters, the company has surpassed consensus FFO estimates three times.

CyrusOne … posted revenues of $251.50 million for the quarter ended June 2019, surpassing the Zacks Consensus Estimate by 5.82%. This compares to year-ago revenues of $196.90 million. The company has topped consensus revenue estimates just once over the last four quarters.”

A Trade for Short Term Bulls

As with the ownership of any stock, buying CONE 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 CONE

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 CONE, the September 20 options allow a trader to gain exposure to the stock.

A September 20 $70 call option can be bought for about $4.10 and the September 20 $75 call could be sold for about $1.95. This trade would cost $2.15 to open, or $215 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 $215.

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 CONE the maximum gain is $2.85 ($75 – $70 = $5; $5 – $2.15 = $2.85). This represents $285 per contract since each contract covers 100 shares.

Most brokers will require minimum trading capital equal to the risk on the trade, or $215 to open this trade.

That is a potential gain of about 132% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.