Personnel Changes Can Lead to Income of More Than 60%
News can move stocks and sometimes, it can seem like trivial or routine news that identify important potential trading opportunities. A recent example, as shown in news from The Street is, Xilinx (Nasdaq: XLNX) declined [recently] after announcing Chief Financial Officer Lorenzo Flores would be leaving the chipmaker.
Toshiba Memory Holdings announced Friday that Flores would be joining the company as vice chairman. Toshiba Memory is expected to rebrand as Kioxia Holdings on Oct. 1.
“Mr. Flores brings a proven track record of strong executive leadership to the company with extensive financial experience in the technology industry,” Toshiba Memory said in a press release. “Mr. Flores will work closely with the executive management team to help lead global business expansion.”
Flores, who has been with Xilinx for 11 years, will leave Xilinx following the release of the company’s fiscal second-quarter earnings on Oct. 23, the company said in a statement.
Xilinx said it has begun a formal search for a new chief financial officer.
CEO Victor Peng will provide oversight of finance operations while the company search for a new finance chief, Xilinx said.
Xilinx also was downgraded to neutral from buy at Bank of America Merrill Lynch … and had its price target cut to $115 from $150.”
Xilinx, Inc. is engaged in designing and developing programmable devices and associated technologies.
The company’s programmable devices and associated technologies include integrated circuits (ICs) in the form of programmable logic devices (PLDs), including programmable System on Chips (SoCs) and three-dimensional ICs (3D ICs); software design tools to program the PLDs; targeted reference designs; printed circuit boards, and intellectual property (IP), which consists of Xilinx, and various third-party verification and IP cores.
The company provides design services, customer training, field engineering and technical support. Its PLDs include field programmable gate arrays (FPGAs), complex programmable logic devices (CPLDs) that its customers program to perform desired logic functions, and programmable SoCs, which combine (Advanced reduced instruction set computing (RISC) Machines (ARM)) processor-based systems with programmable logic in a single device.
The stock’s longer term chart highlights the pressure the stock has been under since early this year. Some selling pressure is most likely related to concerns of the trade war. Those concerns seem as if they are unlikely to be resolved in the short term.
The chart shows the stock price is at an important support level in a down trend. A break below support could be the catalyst for a significant down leg in the price and could push to the next support level which is near $80.
A Trading Strategy To Benefit From Weakness
A price decline often results in higher than average options premiums. That means option buyers will be forced to pay higher than average prices for trades, But, sellers could benefit from the higher premiums.
In this case, with a bearish outlook for the short term, a call option should be sold. The call should decline in value if the stock declines and sellers of calls benefit from this decline.
Selling options can involve a great deal of risk. A spread options strategy can be used to limit the potential risk of the trade.
One strategy that traders can consider is the bear call spread. This is a trade that uses two calls with the same expiration date but different exercise prices.
Traders buy one call and sell another call. The exercise price of the call you sell will be below the exercise price of the long call. The call is sold to limit the risk of the trade. So, this strategy will always generate a credit when it is opened and will always have limited risk.
The risk profile of this trading strategy is summarized in the diagram below which shows the limited risk and reward.
Source: The Options Industry Council
While risks and rewards are limited, this strategy will allow traders to generate potential gains in a stock they might otherwise find too risky to trade. Many individuals ignore bearish strategies because of the risks.
You’ll know the maximum potential gain with this strategy as soon as it’s opened. It is equal to the amount of premium received when the trade is opened. The maximum loss is equal to the difference between the exercise price of the options contracts less the premium received and is also known.
Every day, we scan the markets looking for trades that carry 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.
A Bear Call Spread in XLNX
For XLNX, we could sell an October 18 $95 call for about $9.70 and buy an October 18 $100 call for about $6.60. This trade generates a credit of $3.10, which is the difference in the amount of premium for the call that is sold and the call.
Remember that each contract covers 100 shares, opening this position results in immediate income of $310. The credit received when the trade is opened, $310 in this case, is also the maximum potential profit on the trade.
The maximum risk on the trade is about $190. The risk can be found by subtracting the difference in the strike prices ($500 or $5.00 times 100 since each contract covers 100 shares) and then subtracting the premium received ($310).
This trade in XLNX offers a potential return of about 63% of the amount risked for a holding period that is relatively brief. This is a significant return on the amount of money at risk. This trade delivers the maximum gain if XLNX is below $95 when the options expire, a likely event given the stock’s trend.
Call spreads can be used to generate high returns on small amounts of capital several times a year, offering larger percentage gains for small investors willing to accept the risks of this strategy. Those risks, in dollar terms, are relatively small, about $190 for this trade in XLNX.