Slow and Steady Production Can Deliver Big Gains to Traders
Some companies simply deliver steady operating results. PR Newswire reported an example of this idea,
“BorgWarner passed a major production milestone at its manufacturing facility in Changnyeong, South Korea, completing production of its 70 millionth starter on Aug. 1, 2019.
BorgWarner Inc. (NYSE: BWA) is engaged in providing technology solutions for combustion, hybrid and electric vehicles. The Company’s segments include Engine and Drivetrain.
The Engine segment’s products include turbochargers, timing devices and chains, emissions systems and thermal systems. The Engine segment develops and manufactures products for gasoline and diesel engines, and alternative powertrains.
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The Drivetrain segment’s products include transmission components and systems, all-wheel drive (AWD) torque transfer systems and rotating electrical devices.
The Company’s products are manufactured and sold across the world, primarily to original equipment manufacturers (OEMs) of light vehicles (passenger cars, sport-utility vehicles (SUVs), vans and light trucks). The Company’s products are also sold to other OEMs of commercial vehicles (medium-duty trucks, heavy-duty trucks and buses) and off-highway vehicles (agricultural and construction machinery and marine applications.
PR Newswire continued, “To celebrate this remarkable record, all employees came together for a one-day event after it was achieved. The 70 millionth starter was given to the employee who produced the first product ever in the Korean plant.
“We at BorgWarner are proud to achieve this goal as it shows the success of our starter technology. We combine state-of-the-art technology and extensive engineering expertise with local production for our customers,” said Dr. Stefan Demmerle, President and General Manager, BorgWarner PowerDrive Systems.
“We would like to thank our employees in Changnyeong. Without their dedication and the excellent work they have done during the past 22 years, this would not have been possible. Their commitment should enable us to reach the 100 million mark by 2029.”
BorgWarner’s plant in Changnyeong began producing starters in December 1997.
By providing global OEMs with its advanced and highly efficient products, the business grew rapidly, and a first milestone was reached in May 2002, when 10 million starters were manufactured. Up until now the plant has served a total of 43 OEMs across 21 countries.
The company’s starting motor products are characterized by their robust drive system and ability to withstand the most extreme thermal conditions imaginable. Long life and Change of Mind for stop/start applications allow better fuel economy and CO2 reductions.
BorgWarner delivers its high performing starter product line for light vehicle as well as commercial vehicles.”
This is an example of steady performance and the stock could also show signs of a predictable pattern.
The longer-term chart shows that support could be strong at the current level.
A Trade for Short Term Bulls
As with the ownership of any stock, buying BWA 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 BWA
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 BWA, the November 15 options allow a trader to gain exposure to the stock.
A November 15 $37.50 call option can be bought for about $1.50 and the November 15 $40 call could be sold for about $0.60. This trade would cost $0.90 to open, or $90 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 $90.
The maximum gain on the trade in BWA is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in BWA the maximum gain is $1.60 ($40- $37.50= $2.50; $2.50 – $0.90 = $1.60). This represents $160 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $90 to open this trade.
That is a potential gain of about 177% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.