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Earnings Could Give Investors a 117% Gain In This Stock

Earnings Could Give Investors a 117% Gain In This Stock

Trade summary: A bull call spread in Rogers Corporation (NYSE: ROG) using the November $120 call option which can be bought for about $6.45 and the November $125 call could be sold for about $4.15. This trade would cost $2.30 to open, or $230 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 $230. The maximum gain is $270 per contract. That is a potential gain of about 117% based on the amount risked in the trade.

Now, let’s look at the details.

ROG recently announced financial results for the third quarter of 2020. Traders seemed to like the news.

ROG daily chart

Rogers Corporation designs, develops, manufactures, and sells engineered materials and components worldwide. It operates in Advanced Connectivity Solutions (ACS), Elastomeric Material Solutions (EMS), Power Electronics Solutions (PES), and Other segments.

The ACS segment offers circuit materials and solutions for connectivity applications in wireless infrastructure, automotive, aerospace and defense, connected devices, and wired infrastructure under the RO4000, RO3000, RT/duroid, TMM, AD Series, CuClad, Kappa, DiClad, IsoClad, COOLSPAN, MAGTREX, TC Series, IM Series, 92ML, and CLTE Series names.

The EMS segment provides engineered material solutions, including polyurethane and silicone materials used in cushioning, gasketing, sealing, and vibration management applications for general industrial, portable electronics, automotive, mass transit, aerospace and defense, footwear and impact mitigation, and printing markets; customized silicones used in flex heater and semiconductor thermal applications; and polytetrafluoroethylene and ultra-high molecular weight polyethylene materials used in wire and cable, electrical insulation, and automotive applications under the PORON, BISCO, DeWAL, ARLON, Griswold, eSORBA, XRD, HeatSORB, and R/bak names.

The PES segment offers ceramic substrate materials, busbars, and cooling solutions under the curamik and ROLINX names. The Other segment provides elastomer components; and elastomer floats for level sensing in fuel tanks, motors, and storage tanks for applications in the general industrial and automotive markets under the NITROPHYL and ENDUR names.

According to Business Wire,

“Net sales of $201.9 million increased 5.6% versus the prior quarter. EMS and PES segment sales increased sequentially and were partially offset by lower ACS sales.

EMS net sales increased in the portable electronics and EV/HEV battery markets, partially offset by a decline in mass transit market sales. EMS general industrial sales were approximately flat sequentially.

PES net sales increased in the EV/HEV and renewable energy markets, partially offset by a decline in the industrial power and mass transit markets. ACS net sales decreased in the wireless infrastructure market, partially offset by higher ADAS sales and strong defense market demand.

Gross margin was 37.4%, compared to 36.6% in the prior quarter. The increase in gross margin was due to higher volumes, favorable mix and operational cost savings.

GAAP earnings per share were $0.37, compared to earnings per share of $0.78 in the second quarter of 2020. The decrease in GAAP earnings resulted from higher restructuring related expenses and an increase in accelerated intangible amortization, partially offset by higher gross margin and lower tax expense.

On an adjusted basis, earnings were $1.45 per diluted share compared to adjusted earnings of $1.13 per diluted share in the prior quarter. The increase in adjusted earnings resulted from the improved gross margin and lower tax expense.

“We are encouraged by the growth we saw in many of our strategic markets as well as our strong operational performance, which resulted in revenue and gross margin that exceeded the top end of our guidance expectations,” stated Bruce D. Hoechner, Rogers, President and CEO.

“Q3 sales were driven by strength in the EV/HEV, ADAS, portable electronics and defense markets. For the fourth quarter we expect continued strength in these strategic markets, although visibility to a broader market recovery remains less clear.

We continue to accelerate our efforts to capitalize on the substantial opportunities in Advanced Mobility markets, while also focusing on growth opportunities across our strong and diversified market portfolio.”

ROG is now near resistance but well below 52-week highs. A break of resistance could push the stock substantially higher as momentum traders buy.

ROG weekly chart

A Specific Trade for ROG

 For ROG, the November 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 November $120 call option can be bought for about $6.45 and the November $125 call could be sold for about $4.15. This trade would cost $2.30 to open, or $230 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 $230.

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 ROG, the maximum gain is $270 ($125- $120= $5; 5- $2.30 = $2.70). This represents $270 per contract since each contract covers 100 shares.

Most brokers will require minimum trading capital equal to the risk on the trade, or $230 to open this trade.

That is a potential gain of about 117% 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 ROG 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.

bull call spread

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.