New Products Can Push Stocks Higher
In the 1990s, the CAN SLIM investment strategy was popular. Each letter summarized the factor investors looked for. The most important factor was the N, which stood for new highs, new products or new managements. Newness often boosted a stock.
This could help Polaris Industries which recently announced a new product. Business Wire reported,
“Polaris® RANGER®, the industry’s No.1-selling utility side-by-side vehicle, today introduced the RANGER Accessory Collections campaign focused on helping RANGER owners get even more out of their machine.
Four trusted professionals created RANGER accessory packages for use by land owners, ranchers, waterfowl hunters and big game hunters.
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Polaris RANGER partnered with master craftsman and host and producer of DIY Network’s Barnwood Builders, Mark Bowe (Craftsman Collection), ranch owner and cowboy with a record-setting 24 World Champion titles, Trevor Brazile (Ranch Collection), legendary waterfowl hunter and Habitat Flats owner Tony Vandemore (Waterfowl Collection) and hosts of the CRUSH TV show and renowned professional hunters Lee and Tiffany Lakosky (Big Game Collection).
“For two decades Polaris RANGER has served as an invaluable workhorse for craftsmen, ranchers and hunters,” said Kyle Duea, Vice President of ORV Marketing at Polaris Industries.
“We’re excited to launch our new RANGER Accessory Collections showcasing the various vehicle accessories professionals and hobbyist use to get the job done better.
Each collection was hand selected by experts that trust RANGER to handle the toughest jobs and inspire consumers to do more with their machine.”
Specifically, the company noted, “the Four Accessory Collections are Hand-Selected to Help Craftsman, Ranchers, Waterfowl Hunters and Big Game Hunters Get the Job Done Better.”
The stock appears to be bouncing off support on the news.
In the longer run, the stock appears to be completing a bottoming pattern with a series of higher lows forming on the chart since the end of last year. This can be an indicator of rising demand for the stock and could be bullish.
A Trade for Short Term Bulls
As with the ownership of any stock, buying PII 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 PII
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 Polaris Industries Inc. (NYSE: PII), the August 16 options allow a trader to gain exposure to the stock.
An August 16 $90 call option can be bought for about $3.10 and the August 16 $95 call could be sold for about $1.54. This trade would cost $1.56 to open, or $156 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 $156.
The maximum gain on the trade in PII is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in PII the maximum gain is $3.44 ($95 – $90= $5; $5 – $1.56 = $3.44). This represents $344 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $156 to open this trade.
That is a potential gain of about 120% in PII based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.