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Overstock Could Deliver Another 95% After Its Sharp Rally

Overstock Could Deliver Another 95% After Its Sharp Rally

Trade summary: A bull call spread in Overstock.com, Inc. (Nasdaq: OSTK) using the August $90 call option which can be bought for about $9.69 and the August $95 call could be sold for about $8. This trade would cost $1.69 to open, or $169 since each contract covers 100 shares of stock.

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  • In this trade, the maximum loss would be equal to the amount spent to open the trade, or $169. The maximum gain is $331 per contract. That is a potential gain of about 95% based on the amount risked in the trade.

    Now, let’s look at the details.

    It was just two years ago when CNN reported on Overstock’s unconventional business plans,

    “As an online retailer, Overstock is in bad shape. It keeps losing money, and its sales growth is far behind Amazon.

    But the company doesn’t think that matters. Overstock is going all in on blockchain and cryptocurrencies.

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  • Shares of Overstock (OSTK) surged more than 15% on Friday after the company announced an investment of almost $375 million from GSR Capital, a Hong Kong private equity firm.

    Overstock wants to be more than just an also-ran in online retail. To jump-start growth, it is investing heavily in blockchain technology, the digital ledger that keeps records of transactions in virtual currencies.

    The company has a cryptocurrency unit called tZERO as well as a subsidiary named Medici Ventures that invests in blockchain companies.”

    Now, news services are reporting on the company’s strong operating results.

    The stock jumped on the results.

    OSTK daily chart

    Reports indicate, “In a rapidly shifting and challenging environment, Overstock continues to perform exceptionally well,” said Overstock CEO Jonathan Johnson.

    “Second quarter gross sales in our Overstock Retail business more than doubled year over year. The number of new customers more than tripled year over year. Importantly, our customers are buying our core products—home furnishings—from the safety of their homes as part of the country’s new normal. If business continues as I expect, our Overstock Retail business will achieve sustainable, profitable growth this year.”

    “tZERO and our other Medici Ventures blockchain-based businesses continue to make progress, with several of those companies attracting media attention for their solutions to problems the country now faces,” continued Johnson.

    “As an organization, Overstock remains focused, disciplined, and resilient as our employees execute against our strategic initiatives. I am proud of the progress we have made, and I am confident that we can continue along this profitable trajectory. I look forward to providing a full update on our progress and performance during our earnings call.”

    Second Quarter Financial Highlights

    • Total net revenue was $783 million, an increase of 109% year over year
    • Gross profit was $180 million or 23.0% of total net revenue, an improvement of 321 basis points year over year
    • Net income attributable to stockholders of Overstock.com, Inc. was $36 million, an improvement of $61 million year over year
    • Diluted earnings per share was $0.84, an improvement of $1.53 year over year
    • Adjusted EBITDA (non-GAAP) was $42 million, an improvement of $55 million year over year
    • YTD net cash provided by operating activities was $170 million, an improvement of $236 million year over year
    • YTD free cash flow (non-GAAP) improved $237 million year over year
    • At the end of the second quarter, cash and cash equivalents totaled $319 million

    The stock is now near a multiyear high and a breakout could attract technical traders.

    OSTK weekly chart

    A Specific Trade for OSTK

    For OSTK, the August 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 August $90 call option can be bought for about $9.69 and the August $95 call could be sold for about $8. This trade would cost $1.69 to open, or $169 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 $169.

    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 OSTK, the maximum gain is $331 ($95- $90= $5; 5- $1.69 = $3.31). This represents $331 per contract since each contract covers 100 shares.

    Most brokers will require minimum trading capital equal to the risk on the trade, or $169 to open this trade.

    That is a potential gain of about 95% 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 OSTK 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  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.

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