A Spinoff Could Lead to Gains in This Stock
Tenneco (NYSE: TEN) is one of the world’s leading designers, manufacturers and marketers of Ride Performance and Clean Air products and technology solutions for diversified markets, including light vehicle, commercial truck, off-highway equipment and the aftermarket, with 2017 revenues of $9.3 billion and approximately 32,000 employees worldwide.
The company is planning to make its businesses easier for investors to understand. According to Business Wire,
DRiV Incorporated is the name of the future publicly traded Aftermarket and Ride Performance company that will launch in the second half of this year, following Tenneco Inc.’s separation into two independent companies.
Once it spins, DRiV™ will serve as one of the largest global multi-line, multi-brand aftermarket suppliers and one of the largest global original equipment (OE) ride performance and braking suppliers to aftermarket, light vehicle, and commercial vehicle customers.
“It is a landmark day, now that we are able to announce the future company’s name and identity,” said Brian Kesseler, Co-CEO, Tenneco and future chairman and CEO, DRiV.
“DRiV will be a unique new business, a more than $6 billion start-up, built from the combined strengths of Tenneco, Federal-Mogul and Öhlins – laser-focused on innovation, performance, brand development and customer service.
Our global scale, our stable of well-respected and enduring aftermarket brands and our longtime partnerships with the world’s leading original equipment manufacturers give us a significant competitive advantage.
We are strategically positioned to capitalize on secular trends such as the expansion of vehicles in operation globally, as well as growth in intelligent suspension, new mobility models and the evolution of autonomous driving.”
The DRiV name is emblematic of what the new company expects to be – a global leader in the aftermarket and original equipment businesses, driving advancements that help people get the most out of every vehicle, every ride, every race, and every journey.
“The DRiV name and logo is distinctive, standing out from the competition in both the original equipment and aftermarket spaces,” said Scott Usitalo, the company’s chief marketing officer.
“It personifies the idea that there’s a driving force behind anything in motion. Our mission is to be a driving force that moves people – offering them enhanced ride experiences through differentiated brands, products and technologies.
DRiV is an active name that inspires energy and movement, and signals what we intend to provide to our customers – superior driving advancements.”
Traders seemed to like the news.
Bulls might hope the spinoff reverses a long term down trend in the stock.
A Trade for Short Term Bulls
As with the ownership of any stock, buying TEN 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 TEN
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 TEN, the April 18 options allow a trader to gain exposure to the stock.
An April 18 $38 call option can be bought for about $1.47 and the April 18 $40 call could be sold for about $0.85. This trade would cost $0.62 to open, or $62 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 $62.
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 TEN the maximum gain is $1.38 ($40 – $38 = $2; $2 – $0.62 = $1.38). This represents $138 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $62 to open this trade.
That is a potential gain of about 122% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.