This Argentinian Company Could Create a 57% Gain
Trade summary: A bull call spread in Globant S.A. (NYSE: GLOB) using the July $125 call option which can be bought for about $10.81 and the July $130 call could be sold for about $8.87. This trade would cost $1.94 to open, or $194 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 $1.94. The maximum gain is $306 per contract. That is a potential gain of about 57% based on the amount risked in the trade.
Now, let’s look at the details.
GLOB is a digitally native technology services company. The Company’s principal operating subsidiary is based in Buenos Aires, Argentina but most of its revenues come from North America, primarily the United States.
GLOB builds digital journeys, which consists of different software products, including mobile apps, Web apps, sensors and other software and hardware appliances that work orchestrated by a backend that uses big data and fast data to create a understanding of each consumer and how to act upon each scenario.
To deliver those journeys, GLOB uses a comprehensive approach that includes Stay Relevant, which helps its customers stay fit for the future of their industries; Discover, which think and conceive specific digital journeys for each customer; Build, which creates each digital journey leveraging the work of its Studios, its services over platforms and its agile pods methodologies.
GLOB recently reported earnings and the company was up on the news.
PR Newswire offered details on the earnings report, noting that the first quarter performance was a “Solid Start To The Year Amidst COVID-19 Crisis.”
Revenues rose to $191.6 million, representing 31.1% year over year growth compared to the first
IFRS diluted earnings per share was $0.35 compared to $0.32 in the first quarter of 2019. IFRS is the international accounting standard that is the equivalent of GAAP standards applied in the U.S.
The announcement noted that “Globant completed the first quarter with 12,538 Globers, 11,755 of whom were technology, design and innovation professionals.
The geographic revenue breakdown for the first quarter was as follows: 74.5% from North America (top country: U.S.), 19.5% from Latin America and others (top country: Argentina) and 6.0% from Europe (top country: Spain).
During the twelve months ended March 31, 2020, Globant served a total of 876 customers and continued to increase its wallet share, having 112 accounts with more than $1 million of annual revenues, compared to 91 for the same period one year ago.
Globant’s top customer, top five customers and top ten customers represented 11.7%, 29.1% and 41.0% of first quarter revenues, respectively.
The CEO noted that, “Our rapid response to the crisis has enabled us to reinforce our relations with our customers, as we help them prepare and transform for the new future.
This crisis is presenting new challenges and a more uncertain scenario, though we do not yet know the full extent of the impact that the spread of the COVID-19 pandemic may have on the global economy and therefore on our business, we are confident that as a pure digital player we are extremely well positioned to help companies reinvent themselves and move further into their digital and cognitive transformation.”
The company also offered guidance on the upcoming quarter telling investors to expected revenue of at least $179 million, non-IFRS Adjusted Profit from Operations Margin is estimated to be in the range of 12.5%-14.5% and non-IFRS Adjusted Diluted EPS is estimated to be at least $0.47 (assuming an average of 38.2 million diluted shares outstanding during the second quarter).
The stock is now near the upper edge of an extended trading range and a breakout could result in a significant gain for investors.
A Specific Trade for GLOB
For GLOB, the July 17 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 July 17 $125 call option can be bought for about $10.81 and the July 17 $130 call could be sold for about $8.87. This trade would cost $1.94 to open, or $194 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 $194.
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 GLOB, the maximum gain is $3.06 ($130- $125= $5; 5- $1.94 = $3.06). This represents $306 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $194 to open this trade.
That is a potential gain of about 57% 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 GLOB 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 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.