• Facebook
  • Twitter
  • Podcast

Advertising Could Be the Next Hot Sector

Advertising Could Be the Next Hot Sector

Traders are always searching for the next hot sector, and according to a recent article on Benzinga, the next big thing could be advertising,

“Roku Inc(NASDAQ: ROKU) announced the addition of Activation Insights to its array of over-the-top advertising tools, the Ad Insights Suite.

The move could “serve as a catalyst” for the company’s advertising sales and boosts the near-term and long-term outlook, according to D.A. Davidson.

Tom Forte reiterated a Buy rating on Roku and raised the price target from $92 to $110.

The advertising solution provides data analysis on consumers, enabling advertisers to maximize returns on investment from advertising on Roku’s platform, Forte said in a Thursday note. (See his track record here.)

Activation Insights gives Roku the opportunity to benefit from the shift in television advertising spend — estimated at $70 billion — toward over-the-top and away from linear television, the analyst said.

Video advertising trends may be similar to what was witnessed with mobile advertising, where advertising spend followed an increase in usage, Forte said, adding that he expects Roku to follow the usage trends.

In the first quarter, consumers watched 8.9 billion hours of video content on Roku’s platform, which represents 74.5-percent growth, the analyst said.

Roku cited Magna Global data that indicates over-the-top comprises 29 percent of viewing but only 3 percent of advertising budgets, according to D.A. Davidson.

Activation Insights tracks advertising reach and efficiency on both OTT and linear TV, including the company’s 29.1 million active accounts as of the first quarter, Forte said. This enables advertisers to “maximize incremental audience reach, which we consider to be quite valuable,” he said.

The news may have been the catalyst to push ROKU out of a short term trading range that can be seen in the daily chart.

ROKU daily chart

The weekly chart shows the relatively short trading history of the stock and reveals that it has been volatile with breakouts often followed by additional strength. However the depths of the pullbacks could be alarming to many traders and that means strategies that are capoable of precisely limiting risk could be attractive.

ROKU weekly chart

A Trade for Short Term Bulls

As with the ownership of any stock, buying ROKU 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 ROKU

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 ROKU, the June 21 options allow a trader to gain exposure to the stock.

A June 21 $100 call option can be bought for about $3.90 and the June 21 $105 call could be sold for about $2.35. This trade would cost $1.55 to open, or $155 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 $155

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 ROKU the maximum gain is $3.45 ($105 – $100= $5; $5 – $1.55 = $3.45). This represents $345 per contract since each contract covers 100 shares.

Most brokers will require minimum trading capital equal to the risk on the trade, or $86 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.