International Expansion Could Create a Triple Digit Gain
News can drive stocks, even when the news seems like it may not be significant. In this case, the news is that a company with millions of members and more than 1,400 locations will be adding a few dozen new locations. But this news seemed to push a stock noticeably higher. PR Newswire reported,“Planet Fitness, Inc. (NYSE: PLNT), one of the largest and fastest-growing franchisors and operators of fitness centers in the U.S., today announced the Company’s international expansion to Australia.
The country’s first official Judgement Free Zones are located in Tuggerah and Gosford in the Central Coast of New South Wales, and a location in Casula is expected to open in 2020.”
Traders seemed to be pleased with the news.
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Planet Fitness has signed an Area Development Agreement with Bravo Fit Holdings Pty Ltd., which will bring a minimum of 35 Planet Fitness locations to Australia over the next several years. Bravo is a joint venture among U.S. franchisees, Bravo Fit, LLC and PF Growth Partners, LLC and leading Australian fitness operator, Dallas Rosekelly’s Galactic Fitness Pty.
The company has more than 14.1 million members with clubs located in all 50 states, the District of Columbia, Puerto Rico, Canada, the Dominican Republic, Panama, and Mexico.
“We are excited to announce our plans to expand the Planet Fitness brand into Australia,” said Ray Miolla, Chief Development Officer at Planet Fitness.
“Australia represents a unique opportunity to grow in a market that combines a favorable operational environment, consumer affinity for US brands, a desirable competitive landscape and an opportunity to develop a large fleet of clubs.”
Planet Fitness offers a high-quality fitness experience for extremely affordable prices, including a variety of benefits such as a welcoming, judgement free environment, brand name cardio and strength equipment, fully equipped locker rooms, and is always staffed.
The Planet Fitness Black Card membership includes additional perks, such as access to any club at no additional charge, the ability to bring a guest anytime, and additional amenities like unlimited use of massage chairs, HydroMassage beds, and more.”
The stock is now near recent highs and a break-out to new highs could be bullish from a technical perspective.
A Trade for Short Term Bulls
As with the ownership of any stock, buying PLNT 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.
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 PLNT
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 PLNT, the December 20 options allow a trader to gain exposure to the stock.
A December 20 $70 call option can be bought for about $1.80 and the December 20 $75 call could be sold for about $0.50. This trade would cost $1.30 to open, or $130 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 $130.
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 PLNT the maximum gain is $3.70 ($75 – $70= $5; $5 – $1.30 = $3.70). This represents $370 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $130 to open this trade.
That is a potential gain of about 184% in PLNT, based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.