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Earnings Highlight Yet Another Opportunity for Large Gains

Earnings Highlight Yet Another Opportunity for Large Gains

Trade summary: A bull call spread in PJT Partners Inc. (NYSE: PJT) using the December $70 call option which can be bought for about $2.80 and the December $75 call could be sold for about $1.20. This trade would cost $1.60 to open, or $160 since each contract covers 100 shares of stock.

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  • In this trade, the maximum loss would be equal to the amount spent to open the trade, or $160. The maximum gain is $340 per contract. That is a potential gain of about 112% based on the amount risked in the trade.

    Now, let’s look at the details.

    PJT Partners Inc. is an investment bank, provides various strategic and shareholder advisory, restructuring and special situations, and private fund advisory and fundraising services to corporations, financial sponsors, institutional investors, and governments worldwide.

    It offers a range of financial advisory and transaction execution capability, including mergers and acquisitions, joint ventures, minority investments, asset swaps, divestitures, takeover defenses, corporate finance advisory, private placements, and distressed sales.

    The company also advices companies, creditors, and financial sponsors on exchanges, recapitalizations, reorganizations, debt repurchases, and distressed mergers and acquisitions. In addition, it offers private fund advisory and fundraising services for various investment strategies, including private equity, hedge fund, real estate, and secondary advisory groups.

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  • The company was formerly known as Blackstone Advisory Inc. and changed its name to PJT Partners Inc. in March 2015.

    Business Wire reported the company’s latest earnings report.

    Total Revenues of $297.6 million for third quarter 2020 compared with $174.2 million for the prior year quarter.

    GAAP Net Income and Adjusted Net Income, If-Converted were $58.1 million and $56.7 million, respectively, for the current quarter compared with $14.8 million and $24.5 million, respectively, for the prior year quarter. GAAP Diluted EPS and Adjusted EPS were $1.22 and $1.36, respectively, for the current quarter compared with $0.28 and $0.60, respectively, for the prior year quarter.

    The stock is near its all time highs but has struggled to break out.

    PJT daily chart

    Commenting on the results, Paul J. Taubman, Chairman and Chief Executive Officer, said, “As we mark our five-year anniversary as a public company, we are pleased to report record results for the quarter and the nine months. Our results reflect the unique depth and breadth of our franchise and highlight our differentiated ability to strategically navigate challenging market environments. We remain confident in our future growth prospects.”

    The longer term chart shows that PJT is consolidating after breaking above $60, a price level that created some resistance for more than two years.

    PJT weekly chart

    A Specific Trade for PJT

    For PJT, the December options allow a trader to gain exposure to the stock. This trade will be open for about three weeks and allows for traders to turn over capital quickly, potentially compounding gains several times a year.

    A December $70 call option can be bought for about $2.80 and the December $75 call could be sold for about $1.20. This trade would cost $1.60 to open, or $160 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 $160.

    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 PJT, the maximum gain is $340 ($75- $70= $5; 5- $1.60 = $3.40). This represents $340 per contract since each contract covers 100 shares.

    Most brokers will require minimum trading capital equal to the risk on the trade, or $160 to open this trade.

    That is a potential gain of about 112% 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 PJT 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.

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