Small News Can Spark Big Moves
News is actually considered to be an important catalyst for stock price changes in academic papers. Traders understand this because they see news moves stocks. It’s interesting that academic studies have confirmed this.
Academic studies have shown that news make stock prices move because it is new information. They believe the stock price at any given time reflects all of the news that is known about the stock. New news changes what is known about the stock and should, therefore cause a price move.
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We know that earnings is a story, for example, that changes what is known about a company. That is big news and comes just once every three months. But, sometimes stories that seem small can have an unexpectedly large impact on a stock.
Okta Makes News, and a Move, With a Partner Program
The news actually seemed to be rather innocuous. Business Wire reported that “Okta, Inc. (Nasdaq: OKTA), the leading independent provider of identity for the enterprise, today announced the launch of the Okta Partner Connect program.”
This program is designed “to give partners greater power to choose how to engage and go-to-market with Okta.”
Okta Partner Connect offers new competitive discounts, specializations for services delivery and managed services, and additional opportunities through the Okta Integration Network, as well as a robust set of resources, training and tools.
Okta Partner Connect is designed to help both technology and solution partners to develop expertise around specific business functions, product areas and industries, so they can expertly serve their customers, differentiate their practices and grow a profitable identity and mobility services management business.
Patrick McCue, Senior Vice President of Worldwide Partners, explained, “Identity management and security are top priorities for organizations of every size and industry and Okta technology is used by enterprise customers to manage identity for their users.
Partners are a core part of Okta’s business, allowing us to reach more customers and enabling those customers to leverage the Okta Identity Cloud for seamless and secure user experiences for their organizations.
Okta Partner Connect expands on existing relationships and builds on our mutual success, while allowing partners to utilize even more benefits, resources and tools available from Okta.”
Among the partners is Box.
“At Box, we’re dedicated to bringing best-in-class security and compliance capabilities to enterprises all over the world, and this includes seamlessly integrating with industry-leading security partners like Okta,” said Niall Wall, Senior Vice President Business Development & Platform Sales, Box.
“We are excited to be a member of Okta Partner Connect and provide our thousands of joint customers with the ability to securely store, manage and collaborate on their content in Box, while safeguarding privacy with strong identity and access management with the Okta Identity Cloud.”
This news seems highly technical, but traders responded positively and pushed the stock up sharply.
This move pushed the stock out of its consolidation and the trend now appears to be up.
Because a near term pullback is always possible, traders should consider managing risk and there are strategies that do just that.
A Trade for Short Term Bulls
As with the ownership of any stock, buying OKTA 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 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 prices stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.
A Specific Trade for OKTA
For OKTA, the September 21 options allow a trader to gain exposure to the stock.
A September 21 $75 call option can be bought for about $1.80 and the September 21 $80 call could be sold for about $0.67. This trade would cost $1.13 to open, or $113 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 $113.
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 OKTA the maximum gain is $3.87 ($80 – $75 = $5.00; $5.00 – $1.13 = $3.87). This represents $387 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $113 to open this trade.
That is a potential gain of about 240% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.
In this trade, options provide income and defined risk. These are the type of strategies that are explained and used in TradingTips.com’s Extreme Profits Calendar service. This service uses seasonals as one indicator in its trade selection process. To learn more about how options can be used to meet your goals, click here for details on Extreme Profits Calendar.