News Doesn’t Have To Be Dramatic To Draw In Traders
News can seem innocuous at times but the benign sounding story could actually be a pointer to a stock with significant potential. Or, at times, the news could point to a stock that could be used to create a trading opportunity with significant potential.
The latter situation is the case for a news that Business Wire recently reported. The headline could seem innocuous – “22-year industry veteran will oversee strategy to enhance advisor and client experience.”
But the news doesn’t have to be dramatic to draw the attention of traders. They could be scanning headlines and simply looking for opportunities and large gains when they see the story. In this case, the report noted that,
“Lincoln Financial Network (LFN), the retail wealth management affiliate of Lincoln Financial Group (LNC), announced today that Edward Walters has been appointed senior vice president, Investment Products and Platforms, to lead the broad portfolio of products, solutions and platforms that are available through LFN’s two broker dealers, Lincoln Financial Securities (LFS) and Lincoln Financial Advisors (LFA).”
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It may be a coincidence, but the stock appears to be moving higher.
“We are actively investing in enhanced capabilities across our unique business model to ensure we remain a partner of choice for advisors in a highly competitive environment,” said David Berkowitz, president of LFN.
“Our focus on financial, investment and protection planning is intended to serve the full spectrum of client needs. Ed’s proven track record of innovation and success supports these ongoing initiatives to greatly enhance the advisor and client experience across LFN.”
Walters is an industry leader with a strong background in fee-based managed accounts, mutual funds, ETFs, insurance, annuities and retirement plan services. He joins LFN from T. Rowe Price in Baltimore, where he served as head of managed accounts in the Global Product Group and oversaw product strategy and development. Prior to that, he spent eight years as senior vice president and head of products, research and retirement plan services at Janney Montgomery Scott in Philadelphia, where he managed a group of accomplished research, product and retirement service professionals responsible for $20 billion in assets.
The weekly chart shows the recent rally comes off a small base which could support additional gains.
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 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 LNC
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 LNC, the October 18 options allow a trader to gain exposure to the stock.
An October 18 $62.50 call option can be bought for about $1.92 and the October 18 $65 call could be sold for about $0.80. This trade would cost $1.12 to open, or $112 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 $112.
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 $1.38 ($65 – $62.50= $2.50; $2.50 – $1.12 = $1.38). This represents $138 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $112 to open this trade.
That is a potential gain of about 123% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.