Benefiting From a Retailer’s Move Into China
Fashion has always been a global industry. Even by the 1700s, Americans would import fine products from Europe to enjoy the latest styles. Reproductions then spread the fashion throughout the economy. Now, there is no need to wait years for fashion trends to take hold.
Influencers on social media can create trends in minutes and companies must often act quickly to profit. That could be what’s happening in the case of Canada Goose Holdings Inc. (NYSE: GOOS). The stock is bouncing on news related to spreading its style.
Large crowds have been drawn to Canada Goose’s new outdoor wear store in downtown Beijing, according to Reuters, its first in mainland China, since its opening on Friday, despite sub-zero temperatures and a chill in China’s relations with Canada.
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A long line of shoppers in thick winter coats queued outside the two-story store on Monday afternoon, with waiting times of an hour or more for a look at Canada Goose’s 9,000-yuan ($1,300) parkas.
Canada Goose staff were seen walking up and down the queue asking shoppers which product they were looking for and then telling them whether they had it in stock.
“It’s been popular for ages, but Beijing didn’t have one, only Hong Kong. So, everyone’s come to see it,” said Long Hua, 32, lining up outside the store with a friend.
Ties between China and Canada have turned frosty since the arrest of a top Chinese executive in Vancouver at the request of the United States in December and the subsequent arrest of two Canadians in China on suspicion of endangering state security.
Style Could Trump Politics
Canada Goose opened its Beijing store about two weeks later than initially planned. It has made no connection between the delay and the heightened tensions between the two governments, saying earlier this month that the postponement was due to construction work.
Even as the store opened, construction workers were still seen on scaffolding on one side of the store.
The parka maker has made no mention of the Beijing store opening on its Chinese social media platforms, although the store in Beijing’s swanky Sanlitun district is now listed on the company’s global website.
“We are proud of our newest store in China and look forward to welcoming our fans,” Canada Goose said in an email to Reuters on Monday.
A buoyant sales outlook for mainland China has been shaken in recent weeks by some caustic posts on Chinese social media calling for the boycott of Canada Goose products following Canada’s arrest of Huawei Technologies Co Chief Financial Officer Meng Wanzhou.
Shares of Canada Goose have fallen since Meng’s detention and the ensuing strains between the two countries.
Meng, the daughter of Huawei’s founder, faces U.S. allegations that she misled multinational banks about Iran-linked transactions, putting the banks at risk of violating U.S. sanctions.
Meng has said she is innocent.
The stakes are high for the maker of high-end goose-down coats, which enjoy significant brand recognition in China’s big cities.
Chinese customers account for more than a third of spending on luxury products worldwide and are increasingly shopping in their home market rather than overseas.
This news could trigger at least a brief rebound in the stock.
A Trade for Short Term Bulls
As with the ownership of any stock, buying GOOS 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 prices stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.
A Specific Trade for GOOS
For GOOS, the January 18 options allow a trader to gain exposure to the stock.
A January 18 $45 call option can be bought for about $2.15 and the January 18 $47 call could be sold for about $1.45. This trade would cost $0.70 to open, or $70 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 $70.
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 GOOS the maximum gain is $1.30 ($47 – $45 = $2.00; $2.00 – $0.70 = $1.30). This represents $130 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $70 to open this trade.
That is a potential gain of about 153% in GOOS based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.
In this trade, options provide income and defined risk. These are the type of strategies that are explained and used in TradingTips.com’s Extreme Profits Calendar service. This service uses seasonals as one indicator in its trade selection process. To learn more about how options can be used to meet your goals, click here for details on Extreme Profits Calendar.