Earnings Highlights a Potential 79% Gain
Trade summary: A bull call spread in Corteva, Inc. (NYSE: CTVA) using the December $26 call option which can be bought for about $2.40 and the December $30 call could be sold for about $0.97. This trade would cost $1.43 to open, or $143 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 $143. The maximum gain is $257 per contract. That is a potential gain of about 79% based on the amount risked in the trade.
Now, let’s look at the details.
CTVA is a provider of agricultural products. The company’s seed platform develops and supplies germplasm. Its crop protection platform supplies products to protect crop yields against weeds, insects and disease. It operates through two segments: seed and crop protection.
Its seed segment provides solutions in various crops, including corn, soybean, sunflowers and wheat, and complementary crops such as alfalfa, canola, cotton, rice and sorghum, as well as silage inoculants. Its crop protection segment is focused on developing and supplying crop protection products and services.
It offers a range of crop protection products that service field crops, such as wheat, corn, soybean, sunflower, canola/oilseed rape and rice as well as specialty crops such as fruit, nut, vine, sugarcane, coffee and vegetables.
PR Newswire announced that company “reported net sales for first half 2020 were $9.1 billion, up 2% versus prior year, driven by volume and price improvement. Organic sales1 grew 5%, with growth in each region.
Seed sales rose 6% on a reported basis and 8% on an organic1 basis, with volume and price growth in every region – particularly in corn and soybean in North America.
Crop Protection sales declined 4% on a reported basis – and were up 1% on an organic1 basis, as sales gains in EMEA3 and Asia Pacific were muted by declines in Latin America and North America3.
GAAP income and earnings per share (EPS) from continuing operations were $1.0 billion and $1.37
per share, respectively.
Operating EBITDA1 was $2.0 billion, up 3% versus prior year as price and volume gains in Seed, coupled with execution on synergies and productivity, more than offset currency headwinds and unfavorable geographic mix in Crop Protection.
Merger cost synergies and productivity were approximately $130 million for the first half 2020 and remain on track to be $230 million for the full year.
James C. Collins, Jr., Corteva Chief Executive Officer, told investors, “Our results in the first half of 2020 highlight the strength of our global execution engine and our operational resilience in the face of historic market volatility.
In the first half, we experienced sharp swings in commodity prices and foreign currency rates due to COVID-19, renewed trade and regulatory uncertainty, and new regulatory challenges. Amidst these external pressures, we delivered sales and earnings growth.
We demonstrated strong price execution in Seed, supply chain flexibility, and solid market demand for our balanced and differentiated new product portfolios in both segments.
Our results were strengthened by diligent efforts to further drive down costs, mitigate currency headwinds, and preserve cash.
Further, our balance sheet and liquidity position remain strong, supported by targeted actions taken in the quarter. I am especially proud of our teams around the world, executing with focus and integrity in a rapidly evolving landscape, to ensure continued support for our customers and communities.”
“Looking ahead, we will increase value for stakeholders through continued progress on our strategic objectives – positioning ourselves well to continue growing our presence in key channels and markets.
Our priorities in the second half of 2020 include accelerating productivity actions and supporting the launch of key innovations, such as our Enlist weed control system, that will enable our customers to drive their profitability.”
Recent news has increased optimism in the company and the stock appears to be consolidating recent gains.
The stock could break through resistance and move significantly higher as post-IPO investors record gains.
A Specific Trade for CTVA
For CTVA, the December 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 December $26 call option can be bought for about $2.40 and the December $30 call could be sold for about $0.97. This trade would cost $1.43 to open, or $143 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 $143.
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 CTVA, the maximum gain is $257 ($30- $26= $4; 4- $1.43 = $2.57). This represents $257 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $143 to open this trade.
That is a potential gain of about 79% 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 CTVA 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 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.