Because There’s No Recession In Love. Match Could Deliver a Double Digit Gain
Trade summary: A bull call spread in Match Group, Inc. (Nasdaq: MTCH) using the May 15 $80 call option which can be bought for about $5.85 and the May 15 $85 call could be sold for about $3.56. This trade would cost $2.29 to open, or $229 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 $229. The maximum gain is $271 per contract. That is a potential gain of about 18% based on the amount risked in the trade.
Now, let’s look at the details.
Shares of MTCH were recently upgraded and traders seemed bullish on the news.
According to a report from The Street, MTCH, “owner of dating and hook-up apps including Tinder, OkCupid, Handy and Match.com, said it has actually seen an increase in conversation times across some of its properties.
In a letter about the impact of the pandemic filed with the Securities and Exchange Commission on Tuesday, CEO Shar Dubey noted that while new subscriber growth has taken a hit, the length of users’ conversations has actually increased – particularly among those in the 30-and-under camp.
“This pandemic and resulting isolation has reminded us of the deep need for human connections, people’s adaptability and their willingness to use the tools and technology at hand to stay connected,” Dubey wrote.
“Users across the world are turning to our products to maintain connections, reduce loneliness and boredom and check on people in faraway places.”
The letter noted that new subscriber growth in regions severely impacted by Covid-19 like Italy and Spain have seen “significant” declines.
In the U.S., by contrast, where mandated shelter-in-place rules and quarantines were rolled out later and in different stages than in Europe and Asia, the impact “depends on the level of cases in the region and varies by brand.”
“For example, Tinder in New York state has seen low double-digit declines in new subscribers since the outbreak accelerated, but much of the rest of the country has held up much better,” Dubey said.
“As nearly every aspect of our lives is now conducted via video, singles are also becoming increasingly comfortable with video dates, and we are integrating video chat into our apps,” she wrote.
“We have offered video chat features in the past and seen low usage, but we think this time user behavior is likely to change more permanently.”
Meantime, Jeffries analysts see “no recession in love,” raising their one-year price target on the stock to $74 from $65 based on expectations that the company’s first-quarter results will still touch the low end of the its guidance range, which sees revenue of between $545 million and $555 million.”
The upgrade comes as the stock gives a momentum buy signal.
Stochastics, a popular momentum indicator turned bullish, indicating the decline in the stock could be over.
A Specific Trade for MTCH
For MTCH, the May 15 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 May 15 $80 call option can be bought for about $5.85 and the May 15 $85 call could be sold for about $3.56. This trade would cost $2.29 to open, or $229 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 $229.
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 MTCH the maximum gain is $2.71 ($85- $80= $5; 5 – $2.29 = $2.71). This represents $271 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $229 to open this trade.
That is a potential gain of about 18% 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 MTCH 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 MTCH 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.