Another Income Opportunity From a Disappointing Earnings Report
Earnings season is underway and one trucking company reported a challenging fourth quarter as Benzinga noted, “J.B. Hunt Transport Services Inc. (Nasdaq: JBHT) reported fourth quarter 2019 earnings per share (EPS) of $1.35 versus the consensus estimate of $1.52.
The earnings increase was 67% higher compared to the same period in 2018, which was negatively impacted by $134 million in charges associated with its arbitration with BNSF Railway. Excluding the charges, J.B. Hunt reported EPS of $1.78 in the fourth quarter 2018.”
The stock was down on the news.
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“The … company reported a 5.7% year-over-year increase in revenue to $2.45 billion. J.B. Hunt reported operating income of $205 million, a 20% decline from the 2018 period excluding that period’s arbitration expense.
The company noted higher rail purchased transportation costs, increased rental expense in Final Mile Services, lower gross margins in its Integrated Capacity Solutions (ICS) business and increased IT investment as some of the drags on operating income in the fourth quarter.
Truck revenue declined 20% year-over-year as loads were down 9%, rates per loaded mile declined 11% and length of haul was down 2%. Revenue per tractor per week was down 11% year-over-year at $4,017.
Management said that contractual rates were flat year-over-year. Operating income in the division fell by more than half to $6 million as lower spot market loads and an increase in empty miles impacted results.”
J.B. Hunt Transport Services, Inc. is a surface transportation, delivery, and logistics company in North America. The company segments include Intermodal (JBI), Dedicated Contract Services (DCS), Integrated Capacity Solutions (ICS) and Truck (JBT).
The company, through its subsidiaries, provides transportation and delivery services to a range of customers and consumers throughout the continental United States, Canada and Mexico.
The JBI segment draws on the intermodal services of rail carriers for the underlying linehaul movement of its equipment between rail ramps. Its DCS segment focuses on private fleet conversion and creation in replenishment, specialized equipment and final-mile delivery services.
Its ICS segment provides traditional freight brokerage and transportation logistics solutions to customers through relationships with third-party carriers and integration. Its JBT segment offers full-load, dry-van freight, utilizing tractors operating over roads and highways.
The stock was stalled near resistance as the time of the earnings announcement as the longer term chart using weekly shows. The news could be the catalyst for a break down in the stock as traders sell rather than continuing to hope for good news next quarter.
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.
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 JBHT
For JBHT, we could sell a February 21 $110 call for about $6.10 and buy a February 21 $115 call for about $2.95. This trade generates a credit of $3.15, 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 $315. The credit received when the trade is opened, $315 in this case, is also the maximum potential profit on the trade.
The maximum risk on the trade is about $185. 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 ($315).
This trade offers a potential return of about 170% 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 JBHT is below $110 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 $185 for this trade in JBHT.