Earnings and a New Director Could Push this Stock
This has been a relatively bad quarter for companies with stocks under performing, on average after announcing earnings. That indicates traders should consider paying particular attention to stocks that perform well after announcing their quarterly results.
A strong earnings report pushed Range Resources Corporation (NYSE: RRC) higher.
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Digging Into Earnings
Zacks noted that Range Resources Corporation recently reported third-quarter 2018 earnings (adjusted for one-time items) of 26 cents per share, beating the Zacks Consensus Estimate of 18 cents. The bottom line surged 420% from the year-ago quarter’s figure of 5 cents.
Earnings in third-quarter 2018 were boosted by increase in oil and gas equivalent production as well as price realizations, partially offset by higher expenses.
Total revenues of $811.2 million beat the Zacks Consensus Estimate of $721 million. Moreover, the top line surged 683% year over year from $482 million in the prior-year quarter.
The market action could have broken an extended down trend in the stock.
A New Director Could Signal Change
The company also announced a new director, a potential change of direction. Globe Newswire reported that Steve Gray has been appointed to the Company’s Board of Directors.
Gray’s appointment is effective October 30 and was mutually agreed upon by the Company’s Board of Directors and SailingStone Capital Partners, LLC.
Gray brings a wealth of experience to RRC. Previously, he served as a founder, director and Chief Executive Officer of RSP Permian Inc. from their inception in 2010 to 2018.
When RSP Permian merged with Concho Resources Inc., he joined Concho’s Board of Directors and currently serves on the Reserves Committee. Prior to forming RSP Permian, Gray founded several successful oil and gas ventures spanning nearly 20 years in partnerships with Natural Gas Partners, a private equity company.
“Steve Gray brings great technical expertise and a strong track record of business success in the oil and gas industry to our Board. We are confident Steve’s extensive background in the oil and gas industry will be an asset to the Company as we focus on translating our world-class Marcellus Shale position into shareholder value,” said Jeff Ventura, CEO and President of Range Resources.
Greg Maxwell, Range’s Chairman added “The Range Board is committed to an active and ongoing Board refreshment process, which is critical to maintaining deep industry knowledge and technical expertise and providing robust oversight.
We believe adding an independent director with Steve’s broad experience, coupled with recently announced Board retirements, shows Range’s commitment to best corporate governance practices.”
A Trade for Short Term Bulls
As with the ownership of any stock, buying RRC 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 RRC
For RRC, the December 21 options allow a trader to gain exposure to the stock.
A December 21 $18 call option can be bought for about $1.05 and the December 21 $20 call could be sold for about $0.47. This trade would cost $0.58 to open, or $58 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 $58.
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 RRC the maximum gain is $1.42 ($20 – $18 = $2.00; $2.00 – $0.58 = $1.42). This represents $142 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $58 to open this trade.
That is a potential gain of about 244% 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.