Bain Capital Could Boost This Cloud Services Provider
Trade summary: A bull call spread in Nutanix, Inc. (Nasdaq: NTNX) using the September $27.50 call option which can be bought for about $2.40 and the September $30 call could be sold for about $1.30. This trade would cost $1.10 to open, or $110 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 $110. The maximum gain is $140 per contract. That is a potential gain of about 127% based on the amount risked in the trade.
Now, let’s look at the details.
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NTNX announced that Bain Capital Private Equity will make an investment of $750 million in Convertible Senior Notes to support the Company’s growth initiatives.
Nutanix describes the company as “a global leader in cloud software and a pioneer in hyperconverged infrastructure solutions, making computing invisible anywhere.
Organizations around the world use Nutanix software to leverage a single platform to manage any app at any location for their private, hybrid and multicloud environments.”
This is one example of where a picture can be worth 1,000 words as is so often the case with tech companies working to provide the infrastructure companies rely on.
The announcement noted that, “Bain Capital Private Equity has deep technology investing experience and a strong track record of helping companies scale,” said Dheeraj Pandey, Chairman, Co-Founder and CEO of Nutanix.
“Bain Capital Private Equity’s investment represents a strong vote of confidence in our position as a leader in the hybrid cloud infrastructure (HCI) market and our profound culture of customer delight.”
“Nutanix is executing on a compelling vision for a differentiated hybrid cloud platform that provides flexible environments and is easily paired with other cloud platforms,” commented David Humphrey, a Managing Director at Bain Capital Private Equity.
“We look forward to working closely with the Board and the management team to build on Nutanix’s leadership position and realize its strong vision for the future,” added Max de Groen, a Managing Director at Bain Capital Private Equity.
In connection with the investment, Humphrey and de Groen will join the Nutanix Board of Directors following the close of the transaction, which is expected to occur in late September 2020.
“We are pleased to establish this partnership with Bain Capital Private Equity and look forward to the contributions Dave and Max will make as new board members to build on Nutanix’s success,” concluded Ravi Mhatre, Lead Independent Director.
Bain Capital Private Equity has deep experience in the technology sector, having made investments in a wide range of companies including Applied Systems, BMC Software, CentralSquare Technologies, KIOXIA (formerly known as Toshiba Memory Corp.), NortonLifeLock Inc., Rocket Software, Symantec, Viewpoint Construction Software, Vertafore, Waystar, and Zelis.
The stock chart shows that NTNX has been consolidating and could be set up for a potential move higher.
A Specific Trade for NTNX
For NTNX, 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 $27.50 call option can be bought for about $2.40 and the September $30 call could be sold for about $1.30. This trade would cost $1.10 to open, or $110 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 $110.
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 NTNX, the maximum gain is $140 ($30- $27.50= $2.50; 2.50- $1.10 = $1.40). This represents $140 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $110 to open this trade.
That is a potential gain of about 127% 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 NTNX 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 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.