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Small Acquisition Can Lead to Big Gains for Short-Term Traders

Small Acquisition Can Lead to Big Gains for Short-Term Traders

Trade summary: A bull call spread in Avalara, Inc. (NYSE: AVLR) using the November $155 call option which can be bought for about $11.10 and the November $160 call could be sold for about $9.00. This trade would cost $2.10 to open, or $210 since each contract covers 100 shares of stock.

In this trade, the maximum loss would be equal to the amount spent to open the trade, or $210. The maximum gain is $290 per contract. That is a potential gain of about 38% based on the amount risked in the trade.

Now, let’s look at the details.

Business Wire reported that AVLR, “a leading provider of tax compliance automation for businesses of all sizes, announced that it has acquired Transaction Tax Resources, Inc. (TTR) for approximately $377 million in cash with a portion held back for a 2-year performance-based earnout and to satisfy potential future indemnity claims.

TTR, known as the tax answer company, primarily serves enterprise businesses and their internal tax teams, offering U.S. sales and use tax rates, laws, software, and customer support required for the biggest and most complex companies.

Avalara estimates that on a standalone full-year basis TTR would produce approximately $20 million in 2020 GAAP revenue and be break-even on GAAP operating income.

Avalara and TTR bring together leading tax technology with trusted tax content, extending Avalara’s current products, adding new capabilities, and reaching new segments. TTR’s team, with its culture, training, and experience serving enterprise businesses, will add enterprise capabilities across Avalara’s content, product, sales, and customer support.

TTR brings Avalara more than 1,400 customers, including blue chip customers that represent more than 30% of the Fortune 500, the largest or second largest company in each of 40 industries, 9 of the top 10 healthcare companies, 8 of the top 10 telecommunications companies and 5 of the top 10 IT services firms.

TTR will operate as a subsidiary of Avalara, continuing to serve its customers with trusted solutions while integrating key products into Avalara’s automation tools.

As companies of all sizes continue to introduce, accelerate, or mature their digital strategies, with the addition of TTR, Avalara will build an enterprise-ready tax automation suite.

The combination of Avalara’s powerful technology platform with TTR’s enterprise expertise, service, and go-to-market capabilities will reach new customer segments but also flow richer information and value into content and data that reach all Avalara customers.

“Avalara works every day to improve and expand our compliance content for businesses of all sizes,” said Scott McFarlane, co-founder and CEO of Avalara.

“I have long admired the TTR team and I am excited to have them join Avalara.

As our teams work to integrate and execute, we believe the exchange of expertise, information, and technologies between the two companies will improve our products, grow our business, and continue to pioneer tax technology services in our field.

As more businesses move to rely on digital infrastructure, we believe our technologies will change how tax teams think about cloud-based tax automation to support their business decision-making and growth.”

“Avalara and TTR have a shared vision of alleviating the burden of tax compliance on businesses,” said Shon Holyfield, founder and CEO of Transaction Tax Resources, Inc.

“I work alongside the brightest minds in tax every day – on our team and with our customers. With Avalara, we have a partner that is committed to expanding the reach of our expertise for the benefit of tax and finance teams across all business sizes and verticals.”

Aggregating and providing the most up-to-date, comprehensive tax content has been core to Avalara’s mission and growth strategy since its founding.

Last year, Avalara acquired Indix AI technology to aggregate, maintain, and deliver global product and tax information. With the acquisition of TTR, Avalara furthers its pioneering vision of being part of every transaction in the world through superior content deployed through advanced technologies.

Traders pushed AVLR up on the news.

AVLR daily chart

The long-term chart below shows the full trading history of AVLR which recently reached new highs.

AVLR weekly chart

A Specific Trade for AVLR

 For AVLR, the November 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.

A November $155 call option can be bought for about $11.10 and the November $160 call could be sold for about $9.00. This trade would cost $2.10 to open, or $210 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 $210.

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 AVLR, the maximum gain is $290 ($160- $155= $5; 5- $2.10 = $2.90). This represents $290 per contract since each contract covers 100 shares.

Most brokers will require minimum trading capital equal to the risk on the trade, or $210 to open this trade.

That is a potential gain of about 38% 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 AVLR 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 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.