Herman Miller Shows Work From Home Can Be Profitable
Trade summary: A bull call spread in Herman Miller, Inc. (Nasdaq: MLHR) using the November $35 call option which can be bought for about $3.10 and the November $40 call could be sold for about $1.30. This trade would cost $1.80 to open, or $180 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 $180. The maximum gain is $320 per contract. That is a potential gain of about 177% based on the amount risked in the trade.
Now, let’s look at the details.
MLHR jumped after reporting stronger than expected earnings.
The momentum indicator at the bottom of the chart, the derivative oscillator, is roughly a MACD calculation applied to MACD. The bullish crossover on the news indicates more upside is possible.
PR Newswire provided more details on the earnings.
As a summary, “strong Retail performance and improving global trends help offset near-term demand pressures in North America. Robust gross margin of 39.9% reflects an increase of 320 basis points from last year.”
The company noted, “Our diversified business model coupled with our ability to act quickly and decisively to manage the business drove strong operating performance for the quarter, once again proving our ability to deliver profitable results even in these difficult times.
Our strong performance this quarter validates our strategy, as our multi-channel go-to-market approach enabled us to serve customers where, and how, they needed to be served. The investments we have made in people, technology, and products positioned us to capitalize on emerging opportunities as the needs of our customers quickly evolved due to the onset of the COVID-19 crisis.
Consolidated net sales for the quarter were down by 7% compared to last year and down 13% organically, which excludes the impacts of acquisitions and foreign currency translation.
Our net sales this quarter benefited from the elevated backlog levels we reported at the start of the period, which were driven in part by the impact of manufacturing and project scheduling disruptions experienced during the fourth quarter of last fiscal year. Orders in the quarter were down 18% compared to the prior year on a reported basis and down 24% organically.
Our Retail business led the way this quarter, with orders up an impressive 40% over last year. Demand was led by the Home Office category, which increased nearly 300% over last year. Consumers are also investing in their broader home environments, which led to positive year-on-year demand across multiple product categories, notably Upholstery, Outdoor, and Accessories.
The North America segment continued to feel the effects of COVID-19 on overall demand levels, posting a year-over-year decline of 40%. With that said, we were encouraged to see modest improvement in order trends within this segment in the back half of the quarter.
As a result of our strong operating performance, we delivered earnings per share of $1.24 on both a reported and adjusted basis for the quarter, which reflected a year-over-year increase of 53.1% on a reported basis and 47.6% on an adjusted basis.”
Perhaps most importantly, “Based on our confidence in the strategic direction of the business, strong liquidity position and operating performance this quarter, we are re-establishing a quarterly cash dividend program.
Indicating their shared sense of confidence in our business, our Board of Directors approved a $0.1875 per share dividend that will be paid on January 15, 2021 to shareholders of record as of November 28, 2020.”
The longer term chart below shows that the stock has been drifting higher and this news could accelerate that trend.
A Specific Trade for MLHR
For MLHR, 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 $35 call option can be bought for about $3.10 and the November $40 call could be sold for about $1.30. This trade would cost $1.80 to open, or $180 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 $180.
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 MLHR, the maximum gain is $320 ($40- $35= $5; 5- $1.80 = $3.20). This represents $320 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $180 to open this trade.
That is a potential gain of about 177% 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 MLHR 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.
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.