A Trend Reversal Could Deliver a 184% Gain
Trade summary: A bull call spread in Cloudera, Inc. (NYSE: CLDR) using the September $12.50 call option which can be bought for about $1 and the September $15 call could be sold for about $0.35. This trade would cost $0.65 to open, or $65 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 $65. The maximum gain is $185 per contract. That is a potential gain of about 184% based on the amount risked in the trade.
Now, let’s look at the details.
Since CLDR began trading in 2017, the stock has been in a down trend.
News of a new product release could lead to a break of the trend for this profitable company.
PR Newswire carried the news that CLDR, the enterprise data cloud company, announced the general availability of Cloudera Data Platform Private Cloud (CDP Private Cloud).
“CDP Private Cloud extends cloud-native speed, simplicity and economics for the connected data lifecycle to the data center, enabling IT to respond to business needs faster and deliver rock-solid service levels so people can be more productive with data.
“CDP Private Cloud data analytics experiences help people, teams and businesses work smarter, not harder,” said Anupam Singh, chief customer officer, Cloudera.
“People are more productive because they have self-service access to the data and analytics they need to work more efficiently.
Teams are more collaborative because they can quickly access and share data anywhere. Businesses are more agile because they make decisions faster and better with CDP Private Cloud’s powerful data analytics experiences.”
Operating CDP Private Cloud is simpler for IT, with powerful container-based management tools that reduce the time to deliver analytics and machine learning from weeks to minutes.
It also changes the game for data center economics with container-based analytics and machine learning to help reduce data center costs by increasing server utilization up to 70%, while also reducing storage and data center overhead. Overall, CDP Private Cloud can deliver up to 50% more analytics for the same data center investment.
With CDP Private Cloud, IT can now meet the exponential demand for data analytics and machine learning services, with a petabyte-scale hybrid data architecture that can flex to use private and public clouds.
According to IDC, 84% of customers are repatriating workloads from the public cloud with 67% of applications in both public and private cloud environments.
Hybrid cloud is strategic and practical for large enterprises. CDP Private Cloud is built for hybrid cloud, seamlessly connecting on-premises environments to public clouds with consistent, built-in security and governance. It runs the same easy-to-use analytic experiences in the data center that have been proven in CDP Public Cloud on AWS and Azure. Only Cloudera delivers this level of hybrid cloud user experience, operations consistency and infrastructure choice.”
[Customers include Accenture, IBM and Intel.}
“The ability to leverage data in a multi-cloud environment provides more flexibility for organizations with varying cloud and enterprise data strategies, without compromising security and governance,” said Manish Dasaur, a managing director with Accenture Applied Intelligence.
“Our strategic partnership with Cloudera is rooted in a common and deep belief that the best companies are data-driven ones,” said Daniel Hernandez, General Manager, IBM Data and AI.
“With the evolution of Cloudera to cloud-native architecture, companies are now able to deliver powerful self-service analytics across hybrid and multi-cloud environments, delivering value from edge to cloud,” said Jeremy Rader, General Manager, Digital Transformation and Scale Solutions, Data Platforms Group at Intel.
The stock has been basing and shows significant support on the daily chart shown below.
A Specific Trade for CLDR
For CLDR, the September options allow a trader to gain exposure to the stock. This trade will be open for about four weeks and allows for traders to turn over capital quickly, potentially compounding gains several times a year.
A September $12.50 call option can be bought for about $1 and the September $15 call could be sold for about $0.35. This trade would cost $0.65 to open, or $65 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 $65.
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 CLDR, the maximum gain is $185 ($15- $12.50= $2.50; 2.50- $0.65 = $1.85). This represents $185 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $65 to open this trade.
That is a potential gain of about 184% 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 CLDR 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 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.