An Acquisition Announcement Could Deliver an 85% Gain
Trade summary: A bull call spread in Kornit Digital Ltd. (Nasdaq: KRNT) using the September $60 call option which can be bought for about $3.05 and the September $65 call could be sold for about $1.30. This trade would cost $1.75 to open, or $175 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 $175. The maximum gain is $325 per contract. That is a potential gain of about 85% based on the amount risked in the trade.
Now, let’s look at the details.
KRNT announced, according to GlobeNewswire a deal that could push the stock to new highs.
“Kornit Digital, a worldwide market leader in digital textile printing technology, announced today the acquisition of Custom Gateway, an innovative technology provider of cloud-based software workflow solutions for on-demand production business models.
“I am very pleased to announce the acquisition of Custom Gateway as we augment our market-leading capabilities with their powerful software, which we’ve evaluated thoroughly, including via several strategic customers we share,” said Ronen Samuel, Kornit Digital CEO.
“Brands, retailers, suppliers, and fulfillers of all sizes stand to grow considerably through digital transformation, and with Custom Gateway, Kornit will revolutionize on-demand digital textile production with a unique end-to-end solution, giving us a powerful competitive advantage in the market.”
Custom Gateway’s robust and functionality-rich cloud platform is suitable for both B2B and B2C business models and handles all steps of efficient on-demand production.
The platform enables content sourcing, creation, content management, and display at the front end. Orders created are captured by a robust order management system and are directed to the appropriate back-end production sites using sophisticated routing algorithms. Once orders proceed to the production floor, they are smartly routed and managed, to allow for efficient on-demand production on a mass scale.
The entire process from order creation to shipment is enriched with integrations to existing IT environments, data-driven decisioning, and business intelligence analytics.
By seamlessly connecting front end (online or other storefront) to the most suitable back end (on-demand production and logistics operation), the technology enables customers to realize the full efficiency, scalability, and profitability benefits of digitization.
Supplementing Kornit’s Konnect platform for visibility and control of print operations, Custom Gateway’s platform offers Kornit customers valuable business insights for agility in the face of market dynamics and disruption.
Custom Gateway has over 300 active customers globally, including brand names such as the U.K.’s largest fashion retailer Next, as well as other leading sports, fashion, and content brands.
“We’re excited about bringing these two creative cultures together and know from experience that Kornit and Custom Gateway are built upon a common vision,” said Andrew Talbot, Custom Gateway CEO.
The stock has been in a persistent uptrend and rebounded sharply after stocks bottomed in March, quickly resuming its trend.
A Specific Trade for KRNT
For KRNT, the September 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 September $60 call option can be bought for about $3.05 and the September $65 call could be sold for about $1.30. This trade would cost $1.75 to open, or $175 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 $175.
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 KRNT, the maximum gain is $325 ($65- $60= $5; 5- $1.75 = $3.25). This represents $325 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $175 to open this trade.
That is a potential gain of about 85% 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 KRNT 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.