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How to Generate Immediate Income of More Than 50%

How to Generate Immediate Income of More Than 50%

Earnings reports often send stock prices higher, or lower. An example, as PR Newswire reported, is in the report from Broadridge Financial Solutions, Inc. (NYSE: BR).

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  • “Broadridge continued to execute well in a mixed quarter.  Recurring revenues rose 7% to $648 million, driven by strong revenue from sales as well as contributions from recent acquisitions,” said Tim Gokey , Broadridge’s Chief Executive Officer.

    “Event-driven activity declined 36%, leading to a 5% decline in Adjusted EPS in a seasonally small quarter. Importantly, demand remains robust with strong Closed sales and performance by our recent acquisitions.

    The stock was down on the news.

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    BR daily chart

    The news release continued,

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  • “As we enter the more significant second half, we expect a pick-up in organic growth and full-year Recurring revenue growth of 8-10%. We also expect to deliver within our 8-12% Adjusted EPS guidance, albeit at the low end.

    We continue to be well on-track to achieve the three-year objectives laid out at our 2017 Investor Day, including the high end of our Adjusted EPS objectives,” Mr. Gokey added. “Broadridge remains very well-positioned for growth, and we continue to invest in new products and technology to create value.”

    [For the quarter,]

    Total   revenues increased 2% to $969 million from $953 million in the prior year period.

    Operating income  was $27 million , a decrease of $51 million , or 66%. Operating income margin decreased to 2.8%, compared to 8.2% for the prior year period.

    Interest expense, net was $14 million, an increase of $3 million, or 30%, primarily due to an increase in interest expense from higher borrowings related to acquisitions.

    Net earnings decreased 80% to $10 million and Adjusted Net earnings decreased 7% to $62 million .

    Segment and Other Results for the Second Quarter 2020 compared to Second Quarter 2019

    Investor Communication Solutions (“ICS”) total revenues were $716 million, a decrease of $12 million , or 2%.

    ICS earnings before income taxes were $22 million , a decrease of $15 million , or 40%, primarily due to the decrease in event-driven fee revenues more than offsetting the contribution from higher recurring fee revenues. Pre-tax margins decreased to 3.1% from 5.1%.

    Global Technology and Operations (“GTO”)GTO recurring fee revenues were $281 million , an increase of $34 million , or 14%. The increase was attributable to the combination of revenues from acquisitions (10pts) and organic growth (4pts).

    GTO earnings before income taxes were $49 million , an increase of $2 million , or 3%, compared to $48 million in the prior year period. The increased earnings were primarily due to higher organic revenues, partially offset by the impact of expenditures to implement and support new business.

    Pre-tax margins decreased to 17.4% from 19.2%.

    This news comes as the stock was near its highs and could mark a trend reversal.

    BR weekly chart

    A Trading Strategy To Benefit From Weakness

    A price decline often results in higher than average options premiums. That means option buyers will be forced to pay higher than average prices for trades, But, sellers could benefit from the higher premiums.

    In this case, with a bearish outlook for the short term, a call option should be sold. The call should decline in value if the stock declines and sellers of calls benefit from this decline.

    Selling options can involve a great deal of risk. A spread options strategy can be used to limit the potential risk of the trade.

    One strategy that traders can consider is the bear call spread. This is a trade that uses two calls with the same expiration date but different exercise prices.

    Traders buy one call and sell another call. The exercise price of the call you sell will be below the exercise price of the long call. The call is sold to limit the risk of the trade. So, this strategy will always generate a credit when it is opened and will always have limited risk.

    The risk profile of this trading strategy is summarized in the diagram below which shows the limited risk and reward.

    bear call spread

    Source: The Options Industry Council

    While risks and rewards are limited, this strategy will allow traders to generate potential gains in a stock they might otherwise find too risky to trade. Many individuals ignore bearish strategies because of the risks.

    You’ll know the maximum potential gain with this strategy as soon as it’s opened. It is equal to the amount of premium received when the trade is opened. The maximum loss is equal to the difference between the exercise price of the options contracts less the premium received and is also known.

    Every day, we scan the markets looking for trades that carry 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.

    A Bear Call Spread in BR

    For BR, we could sell a February 21 $115 call for about $5.20 and buy a February 21 $120 call for about $2.15. This trade generates a credit of $3.05, which is the difference in the amount of premium for the call that is sold and the call.

    Remember that each contract covers 100 shares, opening this position results in immediate income of $305. The credit received when the trade is opened, $305 in this case, is also the maximum potential profit on the trade.

    The maximum risk on the trade is about $195. The risk can be found by subtracting the difference in the strike prices ($500 or $5.00 times 100 since each contract covers 100 shares) and then subtracting the premium received ($305).

    This trade offers a potential return of about 56% of the amount risked for a holding period that is relatively brief. This is a significant return on the amount of money at risk. This trade delivers the maximum gain if BR is below $115 when the options expire, a likely event given the stock’s trend.

    Call spreads can be used to generate high returns on small amounts of capital several times a year, offering larger percentage gains for small investors willing to accept the risks of this strategy. Those risks, in dollar terms, are relatively small, about $195 for this trade in BR.

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