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Now This Company Is Prepared For A Food Battle

Now This Company Is Prepared For A Food Battle

Some companies in the tech sector are facing problems as they grow. As Yahoo Finance reported, “Food delivery app giant Grubhub (NYSE: GRUB) is taking a major bite out of restaurants’ profits, according to one New York City councilman.

And now he’s says the Big Apple’s government needs to step in to re-balance the equation.

“Our small businesses, in particular the restaurant owners, are in trouble,” New York City Councilman Mark Gjonaj (D) told Yahoo Finance’s The Ticker. “[GrubHub] really is taking away from the bottom line of these restaurants and undermines their very existence to keep their doors open.”

Gjonaj is helping lead the charge for new regulations that would cap how much delivery companies like Grubhub and Uber Eats (UBER) could make from commissions. A restaurant’s fees for using Grubhub and its subsidiary Seamless typically range anywhere from 10% to 30% per order.

“These restaurants wouldn’t mind paying these high fees provided they’re new customers,” Gjonaj explains. “In fact, the only evidence we’ve seen is that they’re cannibalizing their existing customer base.”

Grubhub is pushing back against those claims.

“A survey done by research firm Technomic this past August found that nearly nine out of 10 independent operators agree that Grubhub increases the volume of takeout and delivery orders,” Grubhub counters in a statement to Yahoo Finance. “Eight of 10 independent operators agree that Grubhub increases customer frequency.

Gjonaj remains unconvinced. He says he’s hearing far different feedback in meetings with local restaurants owners as chair of the New York City Council’s Committee on Small Business.

“The evidence that we see now is what was once a very healthy relationship where both profited now looks like a trojan horse where they’ve undermined the very existence of these businesses,” he says. “We know that the average profit is less than 10%. How is it possible for [restaurants] to survive when they’re paying [nearly] one-third in fees?”

Gjonaj makes clear it’s just not Grubhub in his sights.

“We’re looking at the industry as a the whole,” he explains. “Obviously consumer behavior is demanding food order apps — now we want to make sure it’s a healthy relationship.”

“Everything is on the table at this point.”

The stock has been in a downtrend.

GRUB daily chart

The longer-term chart shows the stock is near support established in 2017.

GRUB weekly chart

A Trade for Short Term Bulls

As with the ownership of any stock, buying GRUB 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.

bull call spread

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 GRUB

 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 GRUB, the November 15 options allow a trader to gain exposure to the stock.

A November 15 $60 call option can be bought for about $2.02 and the November 15 $65 call could be sold for about $1.09. This trade would cost $0.93 to open, or $93 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 $93.

The maximum gain on the trade in GRUB is equal to the difference in exercise prices less the amount of the premium paid to open the trade.

For this trade in GRUB the maximum gain is $4.07 ($65- $60= $5; $5 – $0.93 = $4.07). This represents $407 per contract since each contract covers 100 shares.

Most brokers will require minimum trading capital equal to the risk on the trade, or $93 to open this trade.

That is a potential gain of about 337% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.