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Earnings Push This Stock To New Highs

Earnings Push This Stock To New Highs

The news seems to be unusually bullish for this company as Business Wire recently reported,

“Guidewire Software, Inc. (NYSE: GWRE), provider of the industry platform Property and Casualty (“P&C”) insurers rely upon, today announced its financial results for the fourth fiscal quarter and fiscal year ended July 31, 2019.

The stock jumped on the news.

GWRE daily chart

Business Wire continued:

“Our fourth quarter performance reflects growing P&C industry demand for core system modernization and an increasing preference for cloud-based deployments,” said Marcus Ryu, co-founder and chairman of the board, Guidewire Software.

“During the quarter, six insurers selected InsuranceSuite via Guidewire Cloud, representing a cross-section of the P&C industry, including insurers of multiple sizes and continents, and a mix of new and existing customers.

Our strategic priority is to evolve and scale Guidewire Cloud to serve the operational and advanced analytic needs of the global P&C industry.

With 65% of our new software sales in fiscal year 2019 from cloud products, we believe the industry is increasingly selecting Guidewire Insurance Platform as its platform of choice.”

“It’s exciting to see the increasing demand and momentum for Guidewire Cloud offerings; earning the trust of industry leaders such as American Family Insurance, EMC Insurance Companies, and Gore Mutual Insurance marks a significant milestone for Guidewire and our industry,” said Michael Rosenbaum, chief executive officer, Guidewire Software.

Total revenue for fiscal year 2019 was $719.5 million, an increase of 10% from fiscal year 2018. License and subscription revenue was $385.3 million, an increase of 25%; services revenue was $248.8 million, a decrease of 7%; and maintenance revenue was $85.4 million, an increase of 10%.

GAAP income from operations was $1.5 million for fiscal year 2019, compared with a $15.6 million loss for fiscal year 2018.

Non-GAAP income from operations was $122.1 million for fiscal year 2019, compared with $101.5 million of non-GAAP income for fiscal year 2018.”

The move in the price of the stock appears to be bullish on the weekly chart shown below. The stock cleared a resistance level that dates back more than a year. Reaching new highs could attract new investors and push the share price even higher.

GWRE weekly chart

A Trade for Short Term Bulls

As with the ownership of any stock, buying GWRE 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.

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.

A Specific Trade for GWRE

 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 GWRE, the October 18 options allow a trader to gain exposure to the stock.

An October 18 $110 call option can be bought for about $4.90 and the October 18 $115 call could be sold for about $2.25. This trade would cost $2.65 to open, or $265 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 $265.

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 GWRE the maximum gain is $2.35 ($115 – $110 = $5; $5 – $2.65 = $2.35). This represents $235 per contract since each contract covers 100 shares.

Most brokers will require minimum trading capital equal to the risk on the trade, or $265 to open this trade.

That is a potential gain of about 88% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.