Tech Can Be a Game of Follow the Leader
Sometimes, tech companies jump out to a lead that provides them with decades of profits and control of an industry. At other times, leadership can be short lived, and the former leader needs to adapt to a new environment. At times, that can mean following the lead of new leaders.
In many ways, that would be the sign of a successful company. Rather than denying that trends are changing, they jump on the trend in pursuit of profit. That seems to be the case with Roku (Nasdaq: ROKU).
From Disruptor to Adapter
The Wall Street Journal recently reported, that later this month, Roku will directly sell subscriptions to premium TV channels such as Starz, Showtime and Epix
“The company said it would allow its users to buy pay TV subscriptions through The Roku Channel, its TV- and movie-streaming service, in a manner similar to the way Amazon.com Inc. sells access to premium channels like HBO through its Prime Video platform.
Roku already allows users to subscribe to streaming services by acting as a portal to sign up pages outside its platform. The new feature will allow Roku to sell subscriptions within its own channel, leading to more favorable economics for the company, said Eric Savitz, a spokesman for Roku.
Roku declined to provide specific details on its financial arrangements with premium cable channels. In general, the company takes a cut of revenue for subscriptions sold on its platform or reaps a bonus for each new subscriber that signs up for pay TV services.”
The packages will not be comprehensive. Roku will not, for the time being, be selling subscriptions to popular services like Hulu or Netflix .
A Steady Performer
Roku sells devices that allow users to stream video on their televisions. It has a larger market share than rivals like Apple TV and Amazon Fire TV, according to research company eMarketer.
It also sells advertising on the Roku Channel and in a recently introduced marketplace that allows TV networks to sell spots that target specific audiences.
In its most recent quarter, Roku said its hardware business accounted for $73.3 million of revenue, while its advertising and subscription business brought in about $100 million of revenue.
The Journal noted, “By allowing third parties like Roku to sell their subscriptions, channels such as Showtime and Epix might see some short term benefit in the form of a larger customer base and higher customer retention, said Brandon Ross, a media analyst at brokerage firm BTIG.
But in the long run, allowing a third party to come between their direct relationships with subscribers could hurt their ability to become successful and independent video-streaming services, Mr. Ross said.
“If they’re going to truly become direct-to-consumer platforms, they shouldn’t be wholly reliant on third-party resellers,” Mr. Ross said.
Mr. Savitz described the Roku program as a “win-win” that would give premium video services a new marketing channel to reach additional subscribers.
“We believe our premium subscriptions program will produce better financial performance for participating channels, and for Roku, than they might produce as stand-alone channels on the Roku platform,” Mr. Savitz said.
Amazon has long allowed users to buy subscriptions on its platform to streaming services it doesn’t own.
That approach cedes some shelf space to Amazon’s competitors, but it follows the company’s strategy of providing customers with a variety of options and maximizing the volume of transactions.
Variety earlier reported Roku was planning to launch a video-subscription marketplace.”
The stock rallied slightly on the news.
This could be the catalyst for at least a short-term reversal in the stock.
A Trade for Short Term Bulls
As with the ownership of any stock, buying ROKU 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 prices stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.
A Specific Trade for ROKU
For ROKU, the January 18 options allow a trader to gain exposure to the stock.
A January 18 $35 call option can be bought for about $1.40 and the January 18 $37 call could be sold for about $0.75. This trade would cost $0.65 to open, or $65 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 $65.
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 ROKU the maximum gain is $1.35 ($37 – $35 = $2.00; $2.00 – $0.65 = $1.35). This represents $135 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $65 to open this trade.
That is a potential gain of about 107% 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.