Molson Offers a Triple Digit Trading Opportunity
Trade summary: A bull call spread in Molson Coors Beverage Company (NYSE: TAP) using the December $35 call option which can be bought for about $2.30 and the December $40 call could be sold for about $0.65. This trade would cost $1.65 to open, or $165 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 $165. The maximum gain is $335 per contract. That is a potential gain of about 103% based on the amount risked in the trade.
Now, let’s look at the details.
According to BusinessWire, “Molson Coors president and chief executive officer Gavin Hattersley said:
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“We are very pleased with our performance in the third quarter, as we beat top and bottom-line expectations and made tangible progress on our revitalization plan.
We had bold plans for our business at the beginning of 2020: to build on the strength of our iconic core brands, aggressively grow our above premium portfolio, expand beyond the beer aisle, invest in our capabilities and support our people and our communities.”
The challenges throughout the year presented a lot of new obstacles, for us and every other business around the world. But we met each challenge head on and we never lost sight of our goals or the path we set out on early in the year.
Now we are showing what’s possible when we execute that plan and its our strategy that will allow us to reach further as we drive toward top-line growth.”
In October 2019, Molson Coors Beverage Company laid out a revitalization plan aimed at streamlining the organization and reinvesting resources into its brands and capabilities.
Exactly one year later, the Company is reporting tangible progress against the plan even in spite of the challenges posed by the global coronavirus pandemic. The following highlights are examples of the progress the Company is making as it implements the previously announced revitalization plan and its goal of driving top-line growth:
As the Company builds on the strength of its iconic core brands :
- Coors Light and Miller Lite grew 6.0% and 9.5%, respectively, in the U.S. off-premise so far this year.
- The combined U.S. segment share for Coors Light and Miller Lite has now grown for 24 consecutive quarters six straight years, per Nielsen. The Company aims to move beyond these segment share gains to stabilize its biggest brands in the total beer category.
- Our national champion brands in Europe saw significant volume trend improvement compared to the second quarter due to the phased re-opening, with restrictions, of the on-premise.
As the Company aggressively grows its above premium portfolio:
- Above premium products hit a record high portion of the Companys U.S. portfolio in the third quarter, the highest it has been since the formation of the MillerCoors joint venture in 2008.
- Blue Moon LightSky has become the top selling new beer in the U.S. in 2020, per Nielsen.
- Blue Moon, the largest craft brand family in the U.S., has seen the largest growth in the off-premise among all craft brand families in 2020, per Nielsen.
- The Company announced the creation of a new joint venture with Yuengling to bring its iconic beers westward in the U.S. for the first time.
- Duvel was added to the Companys Canadian portfolio under a new distribution agreement.
- The Company acquired Atwater Brewing, filling a geographic gap in its U.S. craft portfolio.
- Vizzy Hard Seltzer has risen to #8 on the Nielsen top-10 growth brands chart in 2020.
- The Company launched Coors Seltzer at the end of August and sold over 500,000 cases in the first month. The Company believes it can become the #1 beer brand in the segment.
The Company entered into an exclusive agreement with The Coca-Cola Company to manufacture, market and distribute Topo Chico Hard Seltzer in the U.S., which we expect to launch in the first half of 2021.
The Company believes it can capture a double-digit share of the U.S. seltzer market by the end of next year backed by arguably the most complete seltzer portfolio in the business comprised of highly differentiated products.
In the Europe business and outside of its primary market, the Staropramen brand grew brand volumes by approximately 9% in the third quarter of 2020 versus 2019.
The export and license team grew brand volumes by approximately 3% in the third quarter of 2020 versus 2019, thereby expanding the footprint and size of our premium-positioned brands across the Europe business.
As the Company expands beyond the beer aisle:
- Truss, the Companys Canadian cannabis joint venture, has quickly become a market share leader of ready-to-drink cannabis beverages in Canada we estimate a market share of over 50% in key markets, such as Quebec.
- The Company launched a new line of non-alcohol products created by beverage incubator LA Libations LLC.
- The Company took a minority stake in Zen Beverages LLC and its brand ZenWTR, by noted beverage innovator Lance Collins.
- The Company launched Vyne Botanicals hop water in Canada.
This news could explain the stock’s sharp rally off recent lows.
However, the long-term chart using weekly data does show a strong down trend and traders should use caution on new positions until there is a clear sign the trend has reversed. This makes TAP an ideal candidate for a spread trade.
A Specific Trade for TAP
For TAP, 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 $35 call option can be bought for about $2.30 and the December $40 call could be sold for about $0.65. This trade would cost $1.65 to open, or $165 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 $165.
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 TAP, the maximum gain is $335 ($40- $35= $5; 5- $1.65 = $3.35). This represents $335 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $165 to open this trade.
That is a potential gain of about 103% 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 TAP 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.