This Tech Stock Isn’t Even in the Tech Sector
Technology companies can be defined expansively to include companies that implement technologies better than their competitors. This definition would capture companies like Wal Mart in the 1990s.
At that time, Wal Mart was capturing all the data from its point of sales systems to learn what consumers bought. This required the company to connect all of its stores with data systems, often using satellites to relay the data to headquarters.
In Bentonville, Arkansas, Wal Mart built a data center and hired programmers to find uses for the data. This was brand new technology as a 2004 article in The New York Times noted when a hurricane provided a test of “one of their newest data driven weapons, something the company calls predictive technology.”
Stores in the path of the storm were ready with flashlights, batteries, bottled water and strawberry Pop Tarts. All of the data had allowed the company to learn that strawberry toaster pastries sell seven times more than usual when a storm is approaching.
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Predictive technology is no longer novel. Netflix uses it to suggest movies. Amazon uses it to suggest everything to buy. Intel uses it, as we learned, to preload programs and that created a vulnerability in their chips.
But, there are other technologies and Domino’s Pizza, Inc. (NYSE: DPZ) is implementing leading edge technologies to sell more pizza.
Domino’s As a Technology Company
One of the most obvious uses of technology for the company has been the way they make it simple for customers to order pizza. From the comfort of your couch, you can use Twitter, Amazon’s Alexa, Google Home, Apple Watch or your phone to order a pizza.
The company has also been a leader in using mapping technology to improve delivery times. Now, the company is testing drones to make delivery even faster and more reliable.
The results can be seen in sales numbers. In 2009, Domino’s had a 9% share in the pizza restaurant market which increased to a 15% share in 2016, according to market analysis firm NPD Crest. In 2016 alone, sales increased by 10.5%.
These results can also be seen in the stock price. DPZ has gained almost 2,800% since the stock began trading in 2004.
To put these gains in context, the next chart adds the gains of Amazon.com (Nasdaq: AMZN) at the bottom of the chart.
AMZN is up more than 3,100% but at various times, DPZ has been outperforming the pure tech play. AMZN has also been more volatile and few investors would have held the stock through the steep draw downs in equity. DPZ has delivered smoother gains over the long run.
While DPZ is likely to deliver long term gains, the stock could also be interesting as a short term trading opportunity.
A Trade for Short Term Bulls
As with the ownership of any stock, buying DPZ 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 Credit spread option 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.
A Specific Trade for DPZ
For DPZ, the February 16 options allow a trader to gain exposure to the stock.
A February 16 $200 call option can be bought for about $5.00 and the February 16 $210 call could be sold for about $2.65. This trade would cost $2.35 to open, or $235 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 $235.
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 DPZ the maximum gain is $7.65 ($210 – $200 = $10.00; $10.00 – $2.35 = $7.65). This represents $765 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $235 to open this trade.
That is a potential gain of about 31% 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 Trading Tips 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.