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An Earnings Announcement Could Create a Gain of More Than 45%

An Earnings Announcement Could Create a Gain of More Than 45%

Short term traders can benefit from price moves that follow earnings announcements. PR Newswire reported on one earnings report that could set up a trading opportunity.

“Korn Ferry (NYSE: KFY), a global organizational consulting firm, today announced fourth quarter and annual fee revenue of $490.8 million and $1,926.0 million, respectively.  In addition, fourth quarter diluted earnings per share was $0.89and Adjusted diluted earnings per share was $0.88.

Korn Ferry reports annual fee revenue of $1,926.0 million, an increase of 9% year-over-year (12% increase on a constant currency basis), with growth coming from all three lines of business.

Net income attributable to Korn Ferry was $102.7 million in FY’19 with an operating margin of 7.3% and Adjusted EBITDA margin of 16.1%.

Fee revenue was $490.8 million in Q4 FY’19, an increase of 3% (8% increase on a constant currency basis) from Q4 FY’18.

Net income attributable to Korn Ferry was $50.3 million and operating income was $62.3 million in Q4 FY’19 with an operating margin of 12.7%. Q4 FY’19 Adjusted EBITDA was $82.2 million with an Adjusted EBITDA margin of 16.7%.

Q4 FY’19 diluted earnings per share was $0.89 compared to diluted earnings per share of $0.73 in Q4 FY’18. Adjusted diluted earnings per share was $0.88 in Q4 FY’19 compared to Adjusted diluted earnings per share of $0.80 in Q4 FY’18.

The company continued with its balanced approach to capital allocation, buying back $37.4 million of stock during the year and declaring a quarterly dividend of $0.10 per share on June 20, 2019 payable on July 31, 2019 to stockholders of record on July 2, 2019.

“I am pleased to report fee revenue of $491 million and strong profitability, with diluted earnings per share and Adjusted diluted earnings per share of $0.89 and $0.88 during our recently completed fourth quarter.

Net income attributable to Korn Ferry was $50.3 million and operating margin was 12.7%.  Adjusted EBITDA was $82.2 million and EBITDA margin was 16.7% — both all-time highs.  We achieved the highest fiscal year fee revenue in our firm’s history – up 9% on a US GAAP basis year-over-year and 12% at constant currency,” said Gary D. Burnison, CEO of Korn Ferry.

“We have made tremendous progress in the recently completed fiscal year.  Korn Ferry is now the organizational consultancy that helps companies look at talent and strategy together.  We help companies make sure they have the right people, in the right places and for the right rewards.

We bring their strategies to life by redesigning their organizational structure, helping them hire, motivate and hold on to the best people, with the right skills and mindset for the future.  In the fiscal year ahead, we will continue to bridge our clients’ talent and organizational strategies, unlocking their potential and driving superior performance.”

Traders seemed to react to the news by selling.

KFY daily chart

This selling pushed the price below an important support level.

KFY weekly chart

A Trading Strategy To Benefit From Weakness

A price decline often results in higher than average options premiums. That means option buyers will be forced to pay higher than average prices for trades, But, sellers could benefit from the higher premiums.

In this case, with a bearish outlook for the short term, a call option should be sold. The call should decline in value if the stock declines and sellers of calls benefit from this decline.

Selling options can involve a great deal of risk. A spread options strategy can be used to limit the potential risk of the trade.

One strategy that traders can consider is the bear call spread. This is a trade that uses two calls with the same expiration date but different exercise prices.

Traders buy one call and sell another call. The exercise price of the call you sell will be below the exercise price of the long call. The call is sold to limit the risk of the trade. So, this strategy will always generate a credit when it is opened and will always have limited risk.

The risk profile of this trading strategy is summarized in the diagram below which shows the limited risk and reward.

bear call spread

Source: The Options Industry Council

While risks and rewards are limited, this strategy will allow traders to generate potential gains in a stock they might otherwise find too risky to trade. Many individuals ignore bearish strategies because of the risks.

You’ll know the maximum potential gain with this strategy as soon as it’s opened. It is equal to the amount of premium received when the trade is opened. The maximum loss is equal to the difference between the exercise price of the options contracts less the premium received and is also known.

Every day, we scan the markets looking for trades that carry 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.

A Bear Call Spread in KFY

For KFY, we could sell a September 20 $40 call for about $2.40 and buy a September 20 $45 call for about $0.80. This trade generates a credit of $1.60, which is the difference in the amount of premium for the call that is sold and the call.

Remember that each contract covers 100 shares, opening this position results in immediate income of $1.60 The credit received when the trade is opened, $160 in this case, is also the maximum potential profit on the trade.

The maximum risk on the trade is about $340. The risk can be found by subtracting the difference in the strike prices ($500 or $5.00 times 100 since each contract covers 100 shares) and then subtracting the premium received ($160).

This trade in KFY offers a potential return of about 47% of the amount risked for a holding period that is relatively brief. This is a significant return on the amount of money at risk. This trade delivers the maximum gain if KFY is below $40 when the options expire, a likely event given the stock’s trend.

Call spreads can be used to generate high returns on small amounts of capital several times a year, offering larger percentage gains for small investors willing to accept the risks of this strategy. Those risks, in dollar terms, are relatively small, about $340 for this trade in KFY.