Black Friday and Cyber Monday Set Up a Triple Digit Trading Opportunity
Some retailers are reporting strong sales to start the holiday season. Business Wire reported, “Wayfair Inc. (NYSE: W), one of the world’s largest online destinations for the home, [recently] reported a 36 percent increase year over year in direct retail gross sales, defined as dollars of order intake, for the five-day peak shopping period of Thanksgiving Day through Cyber Monday.”
This is good news for a stock that could be bottoming.
Business Wire continued, “Customers took advantage of the ease and convenience of Wayfair’s online shopping experience throughout the entire weekend to discover exceptional value across a wide range of product categories making Black Friday and Cyber Monday Wayfair’s highest revenue days ever.
A record-breaking number of Wayfair customers shopped for every room of the house snapping up great deals across all categories including live Christmas trees and seasonal decor, furniture, rugs, bedding, housewares, large appliances and home improvement items.
More customers than ever before took advantage of Wayfair’s award-winning mobile app for a seamless shopping experience from their phone or tablet with approximately one in four holiday weekend orders placed through the app.
Wayfair Reports 36% Increase in Direct Retail Sales for Peak Five-Day Holiday Shopping Weekend
“Over the Thanksgiving holiday weekend, Wayfair customers took advantage of exceptional value and selection throughout the entire peak holiday period to drive record-breaking revenue days on both Black Friday and Cyber Monday with Thanksgiving Day also gaining tremendous popularity to become the highest growth day of the holiday weekend,” noted Niraj Shah, CEO, co-founder and co-chairman, Wayfair. ”
As in past years, the Thanksgiving weekend marked a very strong sales period with more customers than ever before discovering thousands of Flash Deals and holiday promotions across Wayfair’s vast selection for everything home. We are excited to see the continued growth and momentum as shopping behavior increasingly shifts online and more and more customers discover Wayfair’s unparalleled shopping experience including award-winning customer service and fast, free delivery.”
Whether redecorating or renovating, stocking up for holiday hosting, or purchasing gifts for family and friends, shoppers took advantage of great value across Wayfair’s vast selection throughout the entire holiday weekend with top-sellers across a wide variety of product categories.
The weekly chart shows the low volatility consolidation that followed the most recent sell off could be setting up a bullish price move.
A Trade for Short Term Bulls
As with the ownership of any stock, buying W 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 where the share price and options premiums are often a significant commitment of capital for smaller investors.
A Specific Trade for W
Every day, we scan the markets looking for trades with 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.
For W, the January 17 options allow a trader to gain exposure to the stock.
A January 17 $85 call option can be bought for about $5.50 and the January 17 $87.50 call could be sold for about $4.30. This trade would cost $1.20 to open, or $120 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 $120.
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 W the maximum gain is $1.30 ($87.50 – $85= $2.50; $2.50 – $1.20 = $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 $120 to open this trade.
That is a potential gain of about 108% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.