Analysts Like This Stock and Traders Could Gain 144% In One Month If They’re Right
Trade summary: A bull call spread in GoDaddy Inc. (NYSE: GDDY) using the March 20 $80 call option which can be bought for about $1.95 and the March 20 $85 call could be sold for about $0.50. This trade would cost $1.45 to open, or $145 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 $145. The maximum gain is $355 per contract. That is a potential gain of about 144% based on the amount risked in the trade.
Now, let’s look at the details.
After beating estimates, analysts GoDaddy (NYSE: GDDY) share price jumped.
Attention: Have you heard about this audacious new movement?!
Starting with an announcement late in the day on March 18, 2020, American investors may be in for a nasty surprise. That's when one of the most popular assets in America could suddenly be made illegal.
Analysts reacted to the news according to The Street,
“Analysts at Raymond James, Oppenheimer and RBC Capital fired off bullish takes on GoDaddy after the web-hosting and internet-domain giant topped Wall Street’s revenue estimates.
Raymond James analyst Aaron Kessler boosted his price target to $89 a share from $85 while slapping an outperform rating on the Scottsdale, Ariz., company.
Kessler cited GoDaddy’s increased profitability and bookings growth across a wide range of products, according to Bloomberg.
The Raymond James analyst is also projecting 10% revenue growth at GoDaddy over the long term, with a double-digit jump in free cash flow.
Meanwhile, analysts at Oppenheimer maintained their outperform rating and $88-a-share price target on GoDaddy.
They cited the internet-domain giant’s “steady bookings drive” as well as their expectation of “highly accretive buybacks” over the next 12 to 18 months.
GoDaddy posted revenue of $780.4 million for the quarter that ended in December, beating the estimate of analysts surveyed by Zacks Investment Research. The figure came in above the $695 million the company generated in the year-earlier quarter.
Mark Mahaney, an analyst at RBC Capital, boosted his price target on GoDaddy by $1 a share to $82, citing solid fundamentals and “steady” revenue growth.
Overall, analysts are bullish on GoDaddy’s prospects, with 11 buy ratings, three holds, and no sells, as well as an average price target of $89 a share, according to Bloomberg.”
The weekly chart below shows that the stock has been in a consolidation pattern since early 2018. Completing the pattern provides a long-term price target of more than $100 on the stock, even higher than the analysts’ targets.
Broad consolidation patterns are often bullish since they can be a sign of accumulation. But buying shares of the stock exposes traders to significant risks in dollar terms. A spread trade with options allows traders to obtain exposure to the stock with a defined level of risk. That strategy is explained in detail below, at the end of this article.
A Specific Trade for GDDY
For GDDY, the March 20 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 March 20 $80 call option can be bought for about $1.95 and the March 20 $85 call could be sold for about $0.50. This trade would cost $1.45 to open, or $145 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 $145.
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 GDDY the maximum gain is $3.55 ($85- $80= $5; $5 – $1.45 = $3.55). This represents $355 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $145 to open this trade.
That is a potential gain of about 144% in GDDY 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 GDDY 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 like GDDY, where the share price and options premiums are often a significant commitment of capital for smaller investors.