New Options Could Boost Sales and Offers a Possible 147% Gain
Trade summary: A bull call spread in Lincoln National Corporation (NYSE: LNC) using the October $37.50 call option which can be bought for about $1.90 and the October $40 call could be sold for about $1.08. This trade would cost $0.82 to open, or $82 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 $82. The maximum gain is $168 per contract. That is a potential gain of about 104% based on the amount risked in the trade.
Now, let’s look at the details.
Business Wire reported on a new tool for sales reps that could help boost the company’s top line, “New study also shows digital options can increase likelihood to buy as Lincoln Financial Group offers new online interview tool.
As a result of COVID-19, more than a third of consumers think life insurance is more important and a similar number say they have or are planning to purchase life insurance according to a new study from Lincoln Financial Group.
Additionally, the study found that digital options increase the likelihood to purchase life insurance — especially among younger consumers. While 29% of all consumers surveyed would be more likely to buy life insurance if they could do so completely electronically, that number jumped to 40% among millennials.
To meet these changing customer perceptions and expectations, Lincoln continues to move toward a completely electronic process and now offers a secure online interview tool that allows customers to answer health questions more conveniently and resulting in faster application turnaround times.
“Digital capabilities are more important than ever as we work to meet the evolving needs of our customers and provide experiences consistent with what consumers are used to from other industries,” said Heather Milligan, Senior Vice President, Underwriting & New Business, Lincoln Financial Group.
“The global pandemic has increased awareness around the need for life insurance and now we have to make sure the process is streamlined and convenient. Our online interview tool is the next step in our digital evolution.”
Lincoln National Corporation operates insurance and retirement businesses through subsidiary companies. The company sells a range of wealth protection, accumulation and retirement income products and solutions, through its business segments.
It operates through four segments: Annuities segment, which offers fixed (including indexed) and variable annuities; Retirement Plan Services segment, which provides employers with retirement plan products and services; Life Insurance segment, which focuses on the creation and protection of wealth through life insurance products, and Group Protection, which offers principally group non-medical insurance products.
These products include fixed and indexed annuities, variable annuities, universal life insurance, variable universal life insurance, linked-benefit UL, term life insurance, indexed universal life insurance, employer-sponsored retirement plans and services, and group life, disability and dental.
The news comes as the stock is trading within a relatively narrow range.
The weekly chart shows a buy signal on the stochastics indicator, potentially signaling a bullish breakout from the consolidation pattern.
A Specific Trade for LNC
For LNC, the October 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.
An October $37.50 call option can be bought for about $1.90 and the October $40 call could be sold for about $1.08. This trade would cost $0.82 to open, or $82 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 $82.
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 LNC, the maximum gain is $168 ($40- $37.50= $2.50; 2.50- $0.82 = $1.68). This represents $168 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $82 to open this trade.
That is a potential gain of about 104% 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 LNC 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.